IRAs in all Varieties

It’s never too early to start thinking about retirement, but the issue most often at the forefront of that thought is retirement savings. How can you begin putting money away now so that you will be able to live comfortably after you retire? Depending upon your goals and the amount of time remaining until retirement, there are multiple options and strategies to consider. A very common path for retirement planning is to open an IRA (Individual Retirement Account), as it provides tax benefits in the present as well as retirement savings for the future.  Even if you’ve never heard of an IRA, a quick internet search will yield a variety of different types which can quickly become confusing. Why are there so many different types of IRAs, and what is each designed to accomplish? Information about the most common types of IRA is included below.

Research Tip: When researching various types of IRAs, be careful on the sources you select. Several types of IRAs have become obsolete with changes in the tax code over the years,so be sure that your research sources are offering current information. The general information in this article is based on information current for the2014 tax year.

A Traditional IRA is a retirement account that is funded by the individual. There are annual limits as to how much can be deposited into a traditional IRA. For 2014, that amount is the lesser of $5,500 for those under 50 years of age by the end of the year ($6,500 if the depositoris over 50 or over by the end of the year) or the depositor’s taxable compensation for the year. For tax purposes, amounts deposited into an IRA that do not exceed the annual limits are not taxed during the current tax year. When funds are taken out of the IRA after retirement, they are taxed then as part of your annual income during the year in which they are withdrawn.

Like a traditional IRA, Roth IRAs are retirement accounts that are funded by the individual. There are annual limits as to how much can be deposited into a Roth IRA. For 2014, that amount is the lesser of $5,500 for those under 50 years of age by the end of the year ($6,500 if the depositor is over 50 or over by the end of the year) or the depositor’s taxable compensation for the year. The difference between a Roth IRA and a Traditional IRA is that, for tax purposes, amounts deposited into the Roth IRA are after-tax amounts (the amount deposited is taxed in the year earned). When withdrawn, the funds are non-taxable, as they have already been taxed in the year of deposit.

A SEP (Simplified Employee Pension) IRA is a type of account that is funded by an employer on behalf of employees. It is often utilized by self-employed individuals. Deposit limits tend to be higher for SEP IRAs, and the deposit amounts are taxed when withdrawn. Contributions cannot exceed the lesser of  1) 25% of the employee’s yearly compensation or 2)$51,000 for 2013; $52,000 for 2014.  With a SEP IRA, withdrawals must be taken beginning with the year the employee reaches the age of 70 ½. When opened on behalf of an employee, the SEP IRA is owned and controlled by the employee.

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a type of retirement account that is set up by an employer on behalf of employees. Contributions to the Simple IRA are made by the employee (via salary reduction contributions) and matched by the employer (Employer matching is required up to certain yearly limits).  Employees may contribute up to a maximum of $12,000 yearly for 2013 and 2014. The employer cannot limit the amount of contributions made by the employee, as long as it falls at or under the maximum.

Choosing which IRA is right for you may involve contacting your tax professional and local banker. Some banks, in addition to offering various types of IRAs, also provide retirement savings calculators to help determine how best to reach your retirement goals. Be sure to understand all the options and their tax ramifications before selecting your IRA.

This article is intended to provide general information on various types of IRAs. It is not meant to provide legal, financial, or tax advice. Consult a tax professional regarding your particular set of circumstances. You may also consult www.irs.gov/Retirement-Plans for more detailed information.