What IRA is right for me? You are asking this question, so congratulations, you have already started your journey to saving and investing.
First and foremost, give yourself some credit for even being here reading this.
There are a few different types of IRAs.
In this blog post, we are going to go over different types of IRAs and get more into details.
Why an IRA?
First of all, why an IRA?
As CNN Money explains, an IRA is a good deal because the money in the plan “grows free from the clutches of Uncle Sam.” Income from interest, dividends, and capital gains can compound each year “without taxes nipping away at it.”
You can also escape taxes on either the money you put in or the money you withdraw in retirement (more on that later).
So, the basic answer is, of all the investment options out there, IRAs offer a way to grow your money tax free.
Fun fact: IRA stands for Individual Retirement Arrangement, but many refer to the A as “account.”
What About a 401(k)?
First and foremost, when saving for retirement, you should check out whether or not your employer offers a 401(k). This can give you potential options like matching (your employer “matching” your contributions).
You’ll probably want to sign up for your employer’s 401(k) first.
If your employer doesn’t offer a 401(k) or you are a freelancer or self-employed, or simply just want an additional investment account, we need to discuss IRAs.
#1 Traditional IRA
A traditional IRA is the most popular.
You’ll get a tax break of $6500 in 2023.
If money remains in the protection of the account, investment earnings are not taxed.
Withdrawals in retirement are taxed at your tax rate at that time.
The traditional IRA works if you are in a higher tax bracket.
#2 Roth IRA
Pay now, save later, is kind of the concept of the Roth IRA.
There is no up front tax break, but withdrawals in retirement are tax free.
Roth IRA contributions can be $7000 annually in 2024. If you’re over 50, Roth IRA contributions can be $8000.
You qualify for the Roth if you fall into a certain lower tax bracket now, but think you may be in a higher tax bracket when you retire. If you make $153,000 a year or $228,000 as married joint filers, you qualify.
If you make more, there is a totally legal way to open a Roth IRA. It is called a Backdoor Roth IRA.
Other Types of IRAs
Traditional and Roth IRAs are the most popular, but there are other types of IRAs that may work for you.
#3 SEP IRA
This is a Simplified Employee Pension.
This is like Traditional IRAs, but it is funded by employers for an employee.
You can contribute up to $66,000 in 2023, or up to 25% of employee compensation, whatever is less.
The SEP IRA could work if you are a sole proprietor. You can open up a SEP for yourself.
#4 Nondeductible IRA
If you don’t qualify to contribute to a Roth IRA or deductible IRA, a nondeductible IRA may be for you.
Also, if your spouse has a retirement plan at work and you are above the income limits, you can contribute to an IRA with the nondeductible.
You’ll get the tax advantage of deferred growth on account earnings.
When you retire and file your tax return, you’ll pay on any withdrawn earnings growth, but not the principal.
#5 Spousal IRA
If you work and your spouse doesn’t, or the reverse, this may be for you.
A spousal IRA needs to be opened in the name and social security number of the non-working spouse.
The contribution limits are $7000 per individual in 2024, 50 or older is $8000.
The working spouse can also contribute to the Traditional or Roth IRA.
#6 SIMPLE IRA
A SIMPLE IRA stands for Savings Incentive Match Plan For Employees.
This is kind of like a 401(k) for smaller companies.
Employees can use salary deferral to contribute. The contribution limit is $16,000 in 2024.
#7 Self-directed IRA
This is a bit more advanced IRA, in that using a self-directed IRA allows one to invest in real estate, privately held companies, and a variety of other nontraditional businesses.
This type of IRA requires a trustee or custodian.
That was a lot of information.
The most important thing is that you save for retirement and invest for your future.
Start with your employer and tell them you want to know about 401(k) options and what other investment resources are available to employees.
If you are self-employed or your employer just doesn’t offer a 401(k), make an appointment at whatever brokerage you choose, ask a lot of questions, and then go back and ask more.
It’s your retirement account and your retirement savings.
It’s your money and your future.
Your future retired self will thank you!