Have you ever wondered what an IRA is? IRA stands for Individual Retirement Account and it’s one of your many options for retirements savings. With an IRA, you’ll be storing money away for your future, and depending on the type of IRA you’ll have either a tax-free or tax-deferred growth. In this blog, we’re going to talk about the two types of IRAs, traditional and Roth, as well as which option may be best for you.
When you invest in a traditional IRA, the earnings you make from your contributions to your account are tax-deferred. What this means is, you will pay a tax on your savings and the earnings when you withdraw the money. Since your contributions are made before being taxed, you can deduct the amount you saved from your taxes at tax time.
A Roth IRA is different from traditional IRAs in that you won’t be able to deduct your savings from your income. And when you retire and close the account, you won’t need to pay taxes on the money that your withdraw from the account. Although you’ll be adding money to the account post income tax, you can allow it to grow tax-free. Essentially, what it comes down to is that with traditional IRAs, you’re paying taxes later, whereas with Roth IRA, you’re paying taxes now.
So, if you’re in a higher tax bracket now than when you retire, you should choose a traditional IRA. If you’ll be in a higher tax bracket when you retire, choose a Rock IRA. Obviously, you can’t be sure that this will be the case, so no matter which one you choose, you’re taking a risk.
In a way, the Roth IRA is more flexible, allowing you to withdraw your money at any time without penalty. So, if you’re finding yourself with a shortage of cash before you reach retirement, you’ll be able to take money out of your account without having to worry. However, this only includes the amount that you have contributed, not the money that you have earned from your savings. There is a ten percent penalty for removing your earnings.
Other types of IRAs
A rollover IRA is just what it sounds like. It’s when another type of retirement account, like a 401k, is rolled over into an IRA account. This can be done if you’re switching jobs and you want to transfer your 401k savings to your IRA. However, there may be penalties applied during the transfer process, so make sure you understand what the risks are before you make this decision.
There are a number of reasons you would want to roll over your 401k into an IRA. Most people only take advantage of a 401k because their company matches whatever their contribution is. However, if they leave the company, they’re no longer getting that benefit. Rolling over into an IRA would allow them to have more control over their money.
Simplified Employee Pension Plan
A Simplified Employee Pension Plan or SEP-IRA allows you to add to a traditional IRA as an employee. Any business can set up a SEP-IRA and often allows employees to save more than they would if they had an individual IRA.
A Simple IRA or Savings Incentive Match Plan for Employees is designed for small business or start-up employers who don’t sponsor a retirement plan.
Are you eligible?
Eligibility is another thing to consider if you want to open an IRA. If your income is over a certain amount you might not be eligible for a Roth IRA. An easy way to see if you qualify is to go to RothIRA.com where you can see the income limits. If you’re single or the head of your household, there is a stricted roof on the amount you can earn and still qualify for a Roth IRA.
However, traditional IRAs also have eligibility requirements. If you earn over a certain amount, you’ll be able to deduct your contributions from your income. For more information on this, read this page on IRA deduction limits.
Are they right for you?
Eligibility is one thing, but are IRAs even right for you? How can you be sure that you’ve picked the right IRA? If you’re self-employed and need a way to fund your retirement, IRAs are usually the best option. However, if you work for a company that offers a 401k, you may still want to open an IRA.
Contact Safe IRA Investments
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