Types of IRA Accounts: 6 Popular Options - MagnifyMoney
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Types of IRA Accounts: 6 Popular Options

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Individual retirement accounts (IRAs) help you take control of your retirement. Not only do they empower you to save more for the future beyond your employer’s retirement plan. When you contribute to an IRA, you might also enjoy some unique tax advantages — both today and tomorrow.

To help you better understand your options for saving, we’re reviewing the six most popular types of IRA accounts so you can find the options that best suits where you are today — and where you want to be tomorrow.

6 types of IRA accounts

1. Traditional IRA

  • Might be right for you if: You don’t have retirement plan at work or need the tax deduction for your contributions.
  • Contribution limits: In 2022, you can contribute up to $6,000 per year (or $7,000 if you’re 50+).
  • Tax treatment: You may be eligible to deduct contributions on your taxes, providing you meet certain deductibility income limits.

A traditional IRA is one of the most common IRA types and comes without income limits. For late savers, a traditional IRA can be a powerful choice because you can make contributions up to age 70 1/2. Throughout your saving years, you can potentially deduct your contributions on your income taxes — a benefit that depends on income limits and whether you participate in your employer’s retirement plan.

2. Roth IRA

  • Might be right for you if: You meet the income limits and want tax-free retirement income.
  • Contribution limits: In 2022, you can contribute up to $6,000 per year (or $7,000 if you’re 50+).
  • Tax treatment: You contribute to a Roth post-tax, so you can’t deduct contributions on your taxes.

A Roth IRA shares many features with traditional IRAs, but it’s the only IRA type that gives you tax-free income during retirement. How does it work? Well, you make contributions to your Roth after-tax. That means you get taxed at payday and then make your Roth IRA contributions.

While you’ll pay taxes today, your contributions will grow tax-free and your withdrawals after age 59 1/2 will be tax-free, too. This feature can be especially beneficial if you think you’ll be in a higher tax bracket in retirement. And unlike a traditional IRA, you can withdraw your contributions to a Roth IRA at any time without tax or penalty.

3. SEP IRA

  • Might be right for you if: Business owners who want to offer their employees a retirement plan, as well as freelancers.
  • Contribution limits: For 2022, self-employed individuals can contribute up to 25% of their net earnings from self-employment (not including contributions for themselves), up to $61,000.
  • Tax treatment: Contributions are tax-deductible.

A simplified employee pension (SEP) IRA is on of two types of ira accounts for small business owners, self-employed individuals and freelancers. Generally, SEP IRAs are good accounts for business owners who want to contribute to use their business to help save for retirement. With these accounts, the employer contributes on the employee’s behalf. Thus, as a small business owner, you would contribute to your SEP IRA account and those of your employees using company funds.

4. SIMPLE IRA

  • Might be right for you if: You’re a small business owner who wants to make contributions to an employee’s plan.
  • Contribution limits: In 2022, employers can contribute up to 3% of the employee’s compensation as an employer match, or 2% of the employee’s compensation if the employee doesn’t contribute. The employee contribution limit for 2022 is $14,000.
  • Tax treatment: Contributions are tax-deductible and required every year.

A savings incentive match plan for employees (SIMPLE) IRA is for small-business owners — businesses with 100 employees or fewer — who want to offer a tax-deferred retirement plan for their employees. A SIMPLE IRA requires contributions from the employer, which can be made on their own or to match an employee’s contributions.

If the plan is built to allow them, employees age 50 and older can make catch-up contributions up to $3,000 in 2022.

5. Rollover IRA

  • Might be right for you if: You have 401(k) accounts from past employers.
  • Contribution limits: After rolling over your 401(k) into an IRA, you’re subject to the annual contribution limits for traditional and Roth IRAs.
  • Tax treatment: If you roll over your assets directly, you’ll preserve the tax-deferred status of of your plan assets.

Deciding exactly what you should do with a 401(k) when you leave a job can be tricky. Cashing it out causes you to lose money thanks to penalties and taxes, so a better idea is to roll old 401(k)s over into an IRA. With this approach, you transfer the 401(k) funds into an IRA. The new rollover IRA allows you to keep the full balance and continue to contribute to your account.

6. Spousal IRA

  • Might be right for you if: Nonworking spouses who have spouses with earned income.
  • Contribution limits: You can contribute up to $6,000 per year in 2022 (or $7,000 if you’re 50+).
  • Tax treatment: Tax deductibility depends on whether you open a traditional or Roth IRA.

If you don’t work but your spouse does, you can still save The IRS allows nonworking or low-income spouses to contribute household income into an IRA to save for the future.

A spousal IRA can be either a traditional IRA or Roth IRA, depending on your preference and income. Depending on the account you choose, you can deduct the amount you contribute and watch the money grow tax-deferred over time. It’s a powerful option that can help your retirement nest egg grow as a couple, providing you file your income taxes as “married filing jointly.”

Frequently asked questions

The best type of IRA to open depends on your income, tax status and employment status. To decide which type of IRA might be right for you, we have a handy guide to retirement plans that offer benefits of each so you can find your ideal match.

It depends. With a Roth IRA, you can withdraw your principal (the contributions you make) at any time without penalty. Roth IRA earnings and funds in traditional IRAs are subject to early withdrawal penalties and taxes if you don’t meet certain IRS guidelines.

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