Are you saving for retirement? Do you know what it is you are doing when it comes to your retirement accounts? It is very important to save for retirement and you need to be doing that as early and as often as you can. But there are several different types of retirement accounts that you can chose from so let’s look briefly at each. They are a Traditional IRA, ROTH IRA, SEP IRA, and SIMPLE IRA. Unlike a 401(k) plan which is through your employer an IRA is an account for you that has different requirements, qualifications, limitations and rules that govern them.
Most people are familiar with the Traditional IRA which is funded with pre-tax dollars and the earnings will grow tax deferred. Depending on your income you may be able to deduct some of the contributions from your income taxes. Withdrawals can begin at age 59 ½ without facing penalties. If you do take money out of this account you will pay taxes on the earnings as well as a 10% penalty for an early withdrawal. The exceptions are if you are buying your first home, higher education expenses or a qualifying medical condition allowing you to take a withdrawal without penalty and the proceeds will be reported as income. Also once you reach are 70 ½ you are no longer able to make contributions to the IRA and will be required to make minimum required distributions based on IRS tables. The maximum that an individual can contribute in a year is $5,500 for those under age 50 and $6,500 for those over age 50.
A second option is the ROTH IRA which is made with money which has already been taxed. The basics of the account are the same as a Traditional IRA with the exception that there are no minimum withdrawal requirements at age 70 ½. Also the income guidelines are different and any contributions will not reduce your tax liability. For couples the maximum income that is allowed for a full contribution is $181,000 and $114,000 for singles based on 2014 figures.
The main difference is whether you believe your taxes are higher now or will be higher in retirement. Personally I think younger people have advantages of a ROTH IRA as they are in a lower tax bracket as a rule just out of college thus reducing the tax benefits at the time of the contribution. I personally do not see the tax rate or brackets really being reduced in the future and plan on a tax rate similar to the one I am paying now when I retire.
The third IRA is the SEP IRA or Simplified Employee Pension which lets business owners allocate funds for their and their employees retirement. Any sized business can contribute but there are some specialized rules that accompany the SEP IRA so consult a CPA when establishing these to ensure all the laws and rules are adhered to when operating the IRA. In 2014 a person can contribute $52,000 or 25% of their compensation whichever is less. There are definite tax advantages here for small business owners so please do consult with a CPA or tax professional.
The forth type of IRA is the SIMPLE IRA or Savings Incentive Match Plan for Employees. This is a plan that allows you and your employer to contribute to a Traditional IRA set up by the company. Employees have the option to contribute to these accounts while employers do not which is a little different than the SEP IRA which the employer contributes and it is at their option provided it is equitable to all.
As you can see there are many IRAs available to individuals and the maximum for those who are self-employed. If you have further questions please email me or contact a CPA, tax professional or financial planner.
