You’d be surprised at how many people aren’t totally aware of what IRA retirement plans are or how they even work, so don’t feel alone if that’s the case for you. In a nutshell, IRA retirement plans are individual retirement accounts that you can use for your retirement savings.
To make things just a tiny bit more confusing, you should know that there are several types of IRAs to choose from, such as Roth, traditional, SIMPLE, or SEP. However, they all have their perks and are worth exploring.
When it comes to retirement, having a 401(k) or pension isn’t always enough to provide the income you may need. Because of that, investing money in an IRA can go a long way to help you become prepared for retirement while also saving money on taxes and giving you access to investment options your workplace may not provide.
Your savings will usually much faster in an IRA than in a taxable account. That’s because they are considered to be a tax-advantaged investment. We’ll dig into what that means in just a moment.
Here are the four most popular types of IRA retirement plans—Roth, Traditional, SIMPLE and SEP.
You should be aware that contributions made to Roth IRAs are not tax-deductible, but if you make a withdrawal, they are tax-free so you don’t have to worry about taxes on investment gains. Another plus is that you have the ability to contribute to a Roth IRA at any age, but there are income limits involved.
Contributions made to a traditional IRA are often tax-deductible. That means if you contribute $5000 to a traditional IRA, that could reduce the amount of your taxable income by $6000. You should keep in mind that withdrawals from a traditional IRA are taxable as ordinary income.
The SIMPLE IRA is also is known as a Savings Incentive Match Plan for Employees Individual Retirement Accounts. These are available to small businesses that have fewer than 100 employees, and much like traditional IRAS, the contributions are tax-deductible.
If you’re self-employed or if you’re a small business owner who doesn’t have very many employees, a SEP IRA is a good option They’re similar to traditional IRAS in how the contributions are tax-deductible. Also, Investments will grow tax-deferred until you retire, and that’s when distributions will be taxed as income.
Now that you’ve learned about a few IRA retirement plans, all you need to do now is to work through either a robo-advisor or a broker to get started.