Saving for retirement becomes an increasingly important part of planning for our financial future. One way to save for retirement is through Individual Retirement Accounts (IRAs). IRAs are types of savings accounts designed to assist with retirement planning. There are several different types of IRAs, each with its own unique features and benefits.
Traditional IRA
A traditional IRA is the most popular type of IRA. Contributions to this account are tax-deductible, meaning that one can lower their taxable income by the amount that is contributed to the account. When one withdraws from their retirement contributions and earnings, taxes will be due to them. It is also important to note that one must withdraw a required minimum amount from their traditional IRA every year after the age of 72. However, one can withdraw from their account without any restrictions at the age of 59 and ½ years old.
Roth IRA
Another well-liked IRA is the Roth IRA. Roth IRA payments are not tax deductible, unlike a traditional IRA, but qualifying withdrawals made in retirement are tax-free. In other words, one can withdraw from their retirement contributions and their withdrawals will be tax-free. One can grow their money tax-free for as long as they like because there are no mandatory minimum distributions. Roth IRA is a financially smart and effective choice for seniors that want to pass their money to heirs or who anticipate being in a higher tax bracket in retirement.
SEP (Simplified Employee Pension) IRA
A Simplified Employee Pension (SEP) IRA is a retirement account that lets business owners and independent contractors make contributions to both their own and their employee’s retirement accounts. Tax deductions are available for grants to SEP IRAs, and the funds grow tax-free. The fact that company owners can contribute up to 25% of their income to a SEP IRA, subject to a maximum contribution limit, is a significant advantage above traditional and Roth IRA contribution restrictions.
In conclusion, the different IRA plans have their own distinct features and benefits that are ideal for various individuals with different financial goals. Traditional IRAs provide tax-deductible contributions, Roth IRAs provide tax-free retirement withdrawals, and SEP IRAs are explicitly made for independent contractors and business owners who want to set aside a larger portion of their income for retirement. When selecting an IRA, it is important to understand the restrictions and criteria of each plan. To make an informed choice, consider speaking with a financial counselor.
By Kathy Vu
Senior Care Advising Intern at WellPath Partners
Health Science Student, California State University, Long Beach
