What don’t you know? Many Americans are aware of Roth and Traditional IRAs …but there are also other types of IRAs that serve the self-employed,as well as IRAs for the self-directed investor. Here’s a quick look at several basic classes of IRAs,as well as some variations and additional information.
Traditional. Annual Contribution Limit = $4,000.00*
Created in 1974 as part of the Employment Retirement Income Security Act,the traditional IRA is essentially an individual savings plan. Contributions are tax-deductible (when requirements are met),with an annual limit. Although earnings within the Traditional IRA grow tax-deferred until withdrawal,they will be taxed when withdrawal begins —and this must happen by the time the owner reaches the age of 70 ½. If the required amounts are not withdrawn at that age,a 50% penalty will be assessed on the amount not taken.
Roth. Annual Contribution Limit = $4,000.00*
The Roth IRA began in the 1998 tax year,a result of 1997′s Taxpayer Relief Act. A Roth IRA gives individuals the ability to invest post-tax income (up to a specified amount) each year. Roth IRA earnings grow tax-free,and withdrawals may be made free of penalty after the owner reaches the age of 59 ½,as long as the funds have been in the account for a minimum of five years. While contributions to a Roth IRA are not tax-deductible,a Roth IRA has an advantage on the back end,with fewer requirements and limitations regarding withdrawals.
SIMPLE. Annual Contribution Limit = $10,500.00*
A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a qualified retirement plan provided by employers with 100 employees or fewer. Unlike plans such as the 401(k) or 403(b),a SIMPLE-IRA has (hence the title) much simpler and more affordable administration rules. They have lower contribution limits than many other types of IRAs,but they are funded by pre-tax salary reduction and require the employer to contribute a minimum amount.
SEP. Annual Contribution Limit = $45,000.00*
The SEP-IRA (Simplified Employee Pension) plan tends to be,perhaps surprisingly,even more simple than the SIMPLE-IRA. Contributions are tax-deductible,but as with a Traditional IRA,qualified withdrawals taken after age 59 1/2 are subject to taxation at standard income tax rates. If an employer implements an SEP plan,all employees must receive the same benefits. If you are self-employed with no employees,there are no administration costs.
In issue 16:More info on IRAs.
Scott S. Lovell is the founder of Lovell Hathaway,Your Retirement SpecialistSM ,and is a registered representative offering securities and advisory services through Geneos Wealth Management,Inc. Member FINRA and SIPC. For additional information,Scott can be reached at (435) 656-2518.
