An IRA plan is an excellent savings tool for retirement. There are often tax benefits to contributing to an individual retirement account. There are five types of IRA plans, and knowing which ones you qualify for and which plans are best for you will help maximize your profits. Regardless of which plan you choose, opening an IRA is a positive step towards saving for your future.
A traditional IRA is held at a brokerage house. It is a common plan that is offered by employers. The main incentive to a traditional IRA is the tax deduction. Contributions are fully tax deductible as long as you are within the income and contribution limit guidelines. A traditional IRA is funded with pre-tax dollars, which allows the money to grow more rapidly than post-tax contributions. If you are in a lower tax bracket at retirement than you were while working, then you will have saved money by choosing an IRA that taxes on the withdrawals.
A Roth IRA is a retirement plan that uses post-tax dollars. You pay taxes on your income, then the money is invested into the account. The advantage to this is that at retirement, there are no taxes to pay. Every dollar saved is a dollar that can be spent at retirement. Also, the Roth is lenient on early withdrawals. You can withdraw money to buy your first house, pay for college or pay for medical bills without any penalties. You may begin making withdrawals at age fifty-nine.
A simplified employee pension IRA is used by business owners for themselves and their employees, and it can be used by the self-employed. These are common IRA plans used by small business owners. SEP fund contributions are tax deductible, but contributions cannot exceed twenty-five percent of your annual income.
A SIMPLE IRA is often offered by employers to their employees. It is an employer-sponsored plan, like a 401k, into which employers make contributions. “SIMPLE” stands for “Savings Incentive Match Plan for Employees.” There is a minimum contribution from the employer, and the maximum contribution from the employee is $11,500. There is a very hefty twenty-five percent fee if you decide to make early withdrawals.
An educational IRA, also known as a Coverdell IRA, after Paul Coverdell, the Senator who introduced the bill, is an account used to save for education expenses. It is a similar to a 529 plan. The greatest advantage of the Coverdell over the 529 is that the money can be used for primary and secondary education, not just college-level education fees. The money must be used for the beneficiary or gifted to another family member in order to avoid penalties. You may contribute $2,000 per year for each child.