Individual Retirement Accounts (IRAs)

An IRA, or Individual Retirement Account, provides tax advantages to help you save for retirement. These accounts are crucial tools for building a secure financial future.

The IRS (Internal Revenue Service) sets annual contribution limits for IRAs. As of 2024, you can contribute up to $7,000 if you are under 50 years old, and up to $8,000 if you are 50 or older. These limits help ensure that retirement savings receive favorable tax treatment while preventing excessive tax-deferred or tax-free savings.

There are multiple types of IRAs, each with unique features:

Traditional IRA

• Contributions: Tax-deductible, meaning you can reduce your taxable income for the year you contribute.

• Withdrawals: Taxed as ordinary income when you withdraw during retirement.

• Key Benefit: Immediate tax relief from contributions, beneficial if you expect to be in a lower tax bracket during retirement.

Roth IRA

• Contributions: Made with after-tax dollars, so you don't get a tax deduction when you contribute.

• Withdrawals: Tax-free, provided you meet certain conditions (like being over 59½ and having the account for at least five years).

• Key Benefit: Tax-free income in retirement, advantageous if you expect to be in a higher tax bracket when you retire.

SEP IRA (Simplified Employee Pension)

• Contributions: Made by an employer into an employee's traditional IRA.

• Withdrawals: Taxed as ordinary income upon retirement.

• Key Benefit: Allows employers to contribute more substantial amounts to their employees' retirement savings, often up to 25% of an employee’s compensation.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

• Contributions: Both employers and employees can contribute. Employers are required to either match contributions up to 3% of an employee's compensation or contribute 2% of the employee's compensation regardless of their contribution.

• Withdrawals: Taxed as ordinary income upon retirement.

• Key Benefit: Simplified plan for small businesses to offer retirement benefits to employees, with lower administrative costs than other plans like 401(k)s.

Key Considerations for Traditional vs. Roth IRA

When deciding between a traditional and Roth IRA, consider your current tax situation and your expected tax situation in retirement:

• Traditional IRA: Better if you expect to be in a lower tax bracket when you retire because you get a tax break now and pay taxes later.

• Roth IRA: Better if you expect to be in a higher tax bracket when you retire because you pay taxes now at a lower rate and enjoy tax-free withdrawals later.

Watch this short video on Traditional and Roth IRAs:

Comparison Chart

This chart provides a quick overview of the main differences between the various types of IRAs to help you choose the one that best fits your retirement planning needs.