Here again with another Back to Basics post. This time we’re going to talk about all the different options you have with an Individual Retirement Account (IRA). One or more may be right for you.
Traditional IRA – This IRA is the tax-deferred option available to anyone who has earned income. They are funded with pre-tax dollars giving you an immediate tax break. You don’t pay taxes until you take distributions. You may contribute up to $5,500 in 2013 plus an additional $1,000 catch-up if you are at least 50 years old. Depending on your income, contributions may be tax-deductible. At age 70 1/2, you must start taking required minimum distributions (RMDs) and you may not contribute any longer.
Roth IRA – Not everyone can open a Roth IRA. If you are single and earn more than $127,000 per year or married filing jointly and make $188,000 per year, you cannot open a Roth. The biggest difference is that a Roth is funded with after-tax dollars. You pay the taxes now and in turn get tax-free distributions on your principle and you earnings during retirement. The same limits apply as traditional plans. Since your income is already taxed, there are no RMDs and no age limit to when you can’t contribute.
SEP IRA – This stands for Simplified Employee Pension plan. This is a plan designed for small business owners and self-employed individuals. The plan provides retirement benefits for both the employer and employee. For 2013, you may contribute the lesser of $51,000 or 25% of total compensation. Employers must contribute equally to all employees enrolled in the plan.
SIMPLE IRA – The Savings Incentive Match Plans for Employees is another plan designed for the self-employed or small business (less than 100 employees) owner. Employers are required to provide each employee with either a 3% match or a 2% non-elective contribution for all eligible employees. The employees can also make salary reductions contributions up to a max of $12,000 for 2013. They are easy to start up and maintain.
Spousal IRA – This type is for a person who is either unemployed or underemployed. For regular IRAs, you can only contribute up to the amount you make each year in earned income (such as salary from a job not earnings on investments). If you do not work but have a spouse who does, you can contribute up to the amount of earned income your spouse has. You may opt for a traditional or Roth option and are subject to their respective rules.
Rollover IRA – These accounts are for when you switch jobs or retire altogether. You can take your old account, such as a 401k, and transfer some or all of it (no matter how much) into an IRA. It can be either a traditional or Roth account. Once transferred though, you must adhere to contribution limits for the new IRA.
Inherited IRA – As the name says, this is a retirement plan you inherited from someone else, usually a spouse or parent. A spouse has the option of rolling it over into his or her own IRA. If the decedent has already begun taking RMDs, the beneficiary must continue these based on his or her life expectancy. If they did not reach age 70 1/2 yet, the beneficiary has five years to withdraw the funds.
Self-Directed IRA – Real quick, this is a regular IRA, either traditional or Roth, that you are in total control of. Because of that, you are not limited to the types of investments you can make. A custodian (bank, brokerage house, etc.) may limit you on the types of investments you can make with a regular IRA. There are only a few exceptions that that the IRS has laid out that you cannot invest in.
As you can see, there is a plethora of available IRA plans for you to choose from. Speak with a trusted advisor to see what best suits your needs. The tax experts at the IRA Financial Group are waiting to hear from you. Give them a call at 800.472.0646 or visit their website now!