A traditional Individual Retirement Account (IRA) is one of the most well-known tax-advantaged retirement savings vehicles. However, you may not know that there are five different types of IRAs, each designed to serve a specific purpose. Below, we’ve outlined some high-level details about each.
One characteristic that all IRAs share is the rules regarding withdrawals. Once you reach the age of 73, you must take the required minimum distributions in most circumstances. Withdrawals are taxed as ordinary income and, if taken before the age of 59 and a half, it may be subject to a 10% federal income tax penalty.
- A nondeductible IRA is funded with contributions that cannot be deducted from your taxable income. Typically, this is for people who may exceed Internal Revenue Service income limits or already have a retirement plan through work but want additional tax-deferred investments.
- This high-level summary is for informational purposes only and is not a replacement for real-life advice. Your tax professional can help you determine the tax status of your contribution, and I can help you better understand the role thar each of your retirement accounts plays in your overall financial strategy.
- The spousal IRA allows a working spouse to contribute to an IRA in the name of a non-working spouse with little or no income. The working spouse’s income must equal or exceed the contributions made by both spouses. It is important to remember that funding does not mean ownership. Each spouse is the sole account owner of their IRA.
- A self-directed IRA allows the account holder discretion on how to invest the funds. Self-directed IRAs can be more appropriate for experienced investors.
Small Business IRAs
- SEP (simplified employee pension) IRAs are easy-to-administer retirement plans. These are typically used by sole proprietors or solopreneurs and allow up to $66,000 in contributions (in 2023) or up to 25% of the employee’s compensation, whichever is less.1
- The Savings Incentive Match Plan for Employees (SIMPLE) IRA. Employers who do not offer other retirement plans and have fewer than 100 employees can offer a SIMPLE IRA. Employees can contribute through salary deferrals, here with an annual contribution limit of $15,500 for 2023.2
Remember that retirement strategies involving a Roth IRA may also be a consideration. As part of the SECURE Act 2.0, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.
If you'd like to more closely examine your retirement savings strategy, we'd welcome the opportunity to review your situation.
1 IRS.gov, October 26, 2022
2 IRS.gov, October 26, 2022