Which Types of IRA Are Best For Your Situation?
Retirement is close to the ultimate American Dream but is becoming harder and harder for many people to properly plan. The major ups and downs of the economy and rising inflation make this process hard to handle and challenging to get right. However, that doesn't mean that you have no chance of retiring because steps like investing in an IRA may help you plan this process more effectively.
In this article, we'll examine the various types of IRA options available to you and help you understand which is suited to your unique needs. We'll then answer a few common FAQ with information directly from the IRS. This information should help you fund your retirement more easily and provide you with the money you need to feel comfortable in your later years.
What are the Main Types of IRA Options for Your Needs?
When researching the different IRA options available for you, it is important to know how they differ, what benefits they provide, and much more. Let's take a deep look at the various types of IRA options that may suit your needs, including traditional and Roth options. Doing so can help you talk with your investment professional more easily and get the investment option that fits your financial goals.
What Exactly is an IRA?
The term IRA stands for Individual Retirement Account and is a specialized account you can create with various types of financial institutions. They are designed to be tax-free and tax-deferred accounts that will grow with time and help you retire more easily. There are many IRA account types, including traditional, Roth, and rollover options that you can use when funding your retirement.
An IRA account types differ in various ways, including how you make contributions to them, the amount of money they make, and when you can take money out of them. This information is important to get right because you may find yourself struggling to afford one IRA over another. So, without wasting any further time, let's dive right into the major IRA types and explain which is perfect for your investment.
Traditional IRA: The Most Popular Option
The oldest IRA type option is still the most popular because it remains very diverse, easy to understand, and adaptable to many investing needs. Typically, it starts with an upfront tax break of up to $6,000 when you start one, with an additional $1,000 “catch up” available after you reach 50. This “catch up” extra is designed to help you get more money into your account more quickly.
There are a few important things to consider when buying into a traditional IRA. For example, your investment earnings are not taxed as long as you keep them in the account. This means that you can avoid excessive tax payments by putting money into your IRA. It also explains why you are limited to just $6,000 per year, as any more would affect how much the IRS would be able to tax.
Just as importantly, you typically don't have any fees when starting up an account of this type. Other IRA options may have a specific setup fee, depending on your lender. The only real downside of this option is that other IRA types may make you more money, depending on your financial situation.
Who it Suits?
Typically, a traditional IRA is a great option for people who are in a higher tax bracket now than they'll find themselves in after they retire. It also works really well for people who don't have another retirement option. For example, if you're an hourly worker at a facility that doesn't offer other types of financing plans, buying into a traditional IRA may be a good option for you.
Roth IRA: Provides Tax-Free Withdrawals
The Roth IRA is likely the second most popular option and is designed to save you tax money. You don't get an upfront tax break with this option, meaning that your contributions are not deductible in your taxes. That turns many people off from this option, as does the fact that making too much money to open one. However, there are many benefits that make these a great choice for multiple people.
Roth IRA rules are also usually far more lenient than a traditional IRA. This means that you can withdraw money from it without suffering tax penalties. That said, you might have some penalties when taking money out before retirement. Usually, though, these penalties are far lower than they would be with a traditional IRA, meaning you don't get hit nearly as hard.
If there are so many benefits to the Roth IRA, why don't more people open them? Well, they typically don't make as much as a traditional IRA. That doesn't mean that you won't make a good retirement income with one, mind you. They may also have some fees for opening the account, depending on the institution. It is important to work with your adviser before investing in a Roth IRA.
Who it Suits?
Are you likely to be in a higher tax bracket after you
retire and want tax-free withdrawals? Then, a Roth IRA is
a great option for you. It is also a good type to
consider if you feel like you may dip into your account
before you retire.
Remember: your withdrawals are NOT
taxed, meaning that you don't have to worry about doing
taxes later. That said, you may make less with these
accounts too.
SEP IRA: A Traditional IRA Variant
Are you trying to make up for a lost time after getting a high-paying job later in life? A SEP IRA may be the best option for you. SEP stands for Simplified Employee Pension and is designed to help you save a lot of money to create a payable pension for your retirement. There are many benefits of this option, though it is also not right for everybody who wants an IRA for their retirement needs.
While this option is a traditional IRA in design, it varies quite heavily from a standard traditional option. First of all, you get a much higher annual contribution limit. You can contribute either 25% of your income or $62,000 annually, depending on which amount is lower. This means you can build up a huge account very quickly, letting you catch up on your retirement needs.
That said, an employer offering this option must contribute equally to all employee accounts, meaning that the money your employer offers may be limited. You also cannot contribute to the plan via salary deferral, which may limit what you pay. However, if you're a sole proprietor of a business or buy a SEP plan for yourself outside of your employer, you may make good money with this option.
Who it Suits?
If you're a small business owner or a high-earning individual who can afford the fees required for a SEP, this option may work well as a great way to catch up on your retirement savings. Note that SEP IRA plans also have very strict IRS rules you must follow, and your account may be tax-deductible. Work with your retirement investment team to ensure you don't make any mistakes.
Other Less-Common, But Available, IRA Options to Consider
A vast majority of people will get an IRA that falls into the types mentioned above. However, that doesn't mean that other options are not available for you. Let's take a quick look at a few IRA options that are not as regularly used but which may work for your specific investment needs:
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This plan works like a traditional IRA but is nondeductible, meaning that your contributions are made with after-tax dollars. You will get the tax-deferred growth on the earnings within the account but do pay taxes on any earnings after you withdraw. They work best for people who do not qualify for other IRA options, specifically a Roth IRA.
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If you're married to someone and not working (or only making a small income), you can both contribute to a spousal IRA to help you fund your retirement. They are typically worth more than double the annual IRA contribution limit, though the total amount must be the lesser of your taxable income as well. A great option for married couples who want to earn more retirement income.
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Otherwise known as a Savings Incentive Match Plan for Employees, it is similar to a 401 (k) and is designed for smaller companies or people who are self-employed. It lets you contribute via salary deferral and has tax rules similar to traditional IRAs. They have lower contribution limits than traditional 401 (k) (up to $14,000 annually) and allows catch-up payments.
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A Self-Directed IRA is very similar to traditional and Roth IRA options but typically covers things like stocks, bonds, and mutual funds. You can also own assets like real estate, gold, and companies and use these in your IRA. The IRS doesn't consider things like collectibles or life insurance, though. This option is a good choice for people who want access to alternate investment types.
FAQ About IRAs
The questions below are commonly asked when starting an IRA and are important to know before you begin. We talked directly with the IRS about these questions to ensure that you get the safest information possible for your retirement needs.
How Much Money Can I Put In My IRA?
The federal government typically sets specific limits on how much you can invest in an IRA. Though these typically vary depending on the IRA type that you prefer, it is about $6,000 annually before you're 50 and $7,000 after that. However, it may also be based on your filing status and income, so make sure you talk with financial experts about your options before beginning.
Do Other Retirement Plans Limit My IRA Investments?
Typically, you can contribute to an IRA plan even if you already have a retirement option at your workplace or another type. It all depends on how much money you contribute to these accounts and the limitations set up by your employer. Before assuming that you can or cannot, talk with a financial expert who can help you identify the best investment options that work for your needs.
Can I Take Money From My IRA While Working?
Yes, you can take money from your IRA whenever you want. You don't even have to show that you have a “hardship” that makes your withdrawal necessary. Understand, though, that any money you take from it will be included in your taxable income. In fact, it could be subject to a 10% additional tax if you're under 59 and one-half years old. Typically, it's best to keep your money in the account.
Do I Have to Take Money Out of My IRA at a Certain Point?
When you turn 72, your IRA comes under the Required Minimum Distributions or RMDs. This means that you must take out a certain amount of money each year from your account for your retirement needs. This money is taxable as income, so make sure that you work with your tax preparation team when starting this process. Doing so can ensure that you don't get hit with heavy tax bills.
What are Charitable Distributions?
You can pay your distributions directly to a charity and avoid paying taxes on them. You can even deduct these distributions, depending on the type and whether it qualifies. Many distributions can qualify, such as donations for friends, family, and various charitable causesstrong>. Talking with your financial professional can help to make this process easier to understand.
Can I Convert Between Different IRA Types?
You can roll over funds from a traditional IRA to a Roth IRA if you invest the funds within 60 days after the distribution. It is also possible to transfer funds from trustees to different trustees or to recharacterize your IRA with the holder. This process can help to stabilize your IRA or even help you make more money from it if you invest wisely and use your money to enhance your savings.
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How We Can Help You
Are you having a hard time finding a financial provider who can provide you with a high-quality IRA? It might be time to download our app and start your search. At Goalry, we are dedicated to helping our users find lenders and financial teams that suit their needs. No, we are not a lender nor can we give you or guarantee you money. But we can help make this process easier for you.
How does it work? Our app is built around making it easier to search for financial providers based on your needs. We have collected information about lenders across the country and compiled it into one database. You can then choose your search parameters and find a company that suits your needs. Do you want a traditional IRA or a Roth IRA that fits your lifestyle? Goalry can help you find one.
Create your profile and start searching through each company listing, checking their contact information, reviews from customers, service types, and much more. Navigate directly to their website to apply for an IRA or to learn more about their terms. Goalry will give you all the detailed information that you need and provide you with in-depth information about each of your borrowing options.
Once you find a financial professional that you can trust, you can apply directly with them to start your IRA process. They'll tell you about how much money you need to invest, what fees you might need to pay, and how much you can expect from your IRA over time. This investment process may also include other financial experts, such as lenders focused on your specific economic situation.
In this way, you can carefully plan your retirement process sooner rather than later. Even if you can't afford to invest in some IRA options, Goalry can help you find an option that you can. Don't think that a limited income eliminates your investment options! While you may be more limited, careful money management can ensure that you fund your retirement smartly.
Final Thoughts
As you can see, it is important to consider starting your IRA sooner rather than later. If you choose from among the many types of IRA and find one that suits you right away, it should be easier to find a company that can help you get started. Many financial companies are available to help you in this process, each with slightly different processes and investment options for their many clients.
The earlier you start, the more money you can save for your retirement. There's nothing better than knowing that you won't have to struggle after you retire or that you can even retire in the first place. You don't have to work hard until the day you die if you carefully plan your finances and make sure that you grow a strong and diverse retirement portfolio for your needs.