Types of IRAs: Which One is Right for You

by Spero Financial

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Have you started planning for retirement yet? Even if you’ve only started working recently, it’s never too early to start contributing to your retirement. The earlier you start saving money, the better off you will be when the time comes to take it easy in your Golden Years. There are several ways to start saving for a post-working life, but knowing where to start can be overwhelming. If you are considering a plan to start saving for retirement, a beneficial place to start is taking a look at opening an IRA.

What is an IRA?

An IRA is an individual retirement account – or a form of pension that may provide tax breaks on retirement savings to the account holder. There are several types of IRAs to choose from, each with a distinctive tax advantage. Depending on your current situation and future goals, investing in multiple IRAs can be part of a well-rounded retirement strategy.

Why Open an IRA?

Opening an IRA is a smart way to diversify your retirement savings and investments. While many companies offer retirement savings in the form of a 401(k) to their employees, this may not be enough to supplement the income needed in retirement. You can contribute to both a 401(k) and IRA to maximize your savings potential for the later years of your life. If you can, most financial experts recommend that you contribute the maximum amount possible to your IRA to get the most out of your savings.

Learn more: Why You Should Open An IRA With Your Credit Union

Types of IRAs

Traditional IRA

A traditional IRA allows the account holder to make pre-tax contributions towards retirement. Required minimum distributions start when the account holder turns 72, and the distributions are taxed at the current income tax rate of the account’s owner. Annual contributions are limited to $6,000 if you are younger than 50 and $7,000 if you're 50 or older. 

Roth IRA

Roth IRA's share the same contribution limits as a traditional IRA but your filing status and income level may affect what you can contribute.  Contributions to a Roth IRA are made on an after-tax basis; therefore, your withdrawals are not taxed.  This makes a Roth IRA a good choice for those who expect their tax bracket to be higher when they retire than it is currently. 

SEP IRA

A SEP (Simplified Employee Pension) IRA is a type of traditional IRA that employers set up for their employees. Annual contributions to a SEP IRA are higher than other tax-favored retirement accounts. Employer contributions must be equal for all employees, regardless of the employer’s cash flow. Based on these considerations, SEP IRAs are typically a good choice for self-employed people or small-business owners.

SIMPLE IRA

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees. Similar to employer-sponsored 401(k)s, SIMPLE IRAs offer an attractive option for small businesses and individuals who are self-employed. Contribution limits to SIMPLE IRAs are lower than contributions for 401(k)s. Employers must match up to 3% of the employee's compensation or maintain a fixed contribution of 2%.

Nondeductible IRA

Much like a Roth IRA, the contributions to a Nondeductible IRA are made using funds that have already been taxed; therefore, your withdrawals are not taxed. These retirement accounts are a good option for those who earn more than the income limits set by a Traditional or Roth IRA. No matter the income of the account holder, they can contribute to their Nondeductible IRA. It’s worth noting that Nondeductible IRAs do not have the same tax benefits as other IRAs, as contributions can only be made with after-tax dollars.

Spousal IRA

Spousal IRAs are a good option for married couples where one spouse earns little or no income. The couple must file a joint tax return and have taxable compensation to be eligible for a Spousal IRA. The working spouse contributes to the account under the name and social security number of the non-working spouse. Contribution limits are maxed out at $12,000 per year for those under 50 and $13,000 for those 50 and older.

Planning for your retirement doesn’t have to be a huge undertaking. Knowing the IRA options available to you is a helpful first step in planning your financial future. Chances are, there is an IRA that will fit your needs and help you start planning the perfect retirement.

Ready to talk IRAs? Spero is ready to help! We offer Traditional and Roth IRAs and would love to help you discover which option is right for you. Contact a Spero representative today to get started!


This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual. Consult a tax advisor for more details.

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