An Introductory Guide to the Types of IRAs
IRAs are often labeled the ultimate retirement vehicles. These accounts offer compound interest and tax savings to qualified account holders, and have been the investment vehicle of choice for smart individuals who want to build their savings over an extended period of time. If you are looking for an effective way to build your nest egg for your Golden Years, it is important to diversify your investment portfolio. One part of this portfolio should include an IRA. If you are not familiar with the types of IRAs that are available to you, here is a brief introductory guide to help you make the right selection.
IRAs Galore: Selecting the Appropriate Type
Believe it or not, there are 11 different types of IRAs that are designed for different types of savings and contributors. If you are interested in opening an IRA account so that you can contribute and appreciate tax savings, you need to select the savings plan that will benefit you the most. There is the traditional IRA that offers short-term tax benefits in the form of deductions, and there is the Roth IRA that may offer some account holders tax-free withdrawals when eligibility requirements are met. Here is a basic description of those 11 different IRAs that you can choose from:
Individual Retirement Account: Unlike a 401(k) offered by an employer, traditional and Roth IRAs are savings plans that you open on your own at a bank or brokerage. By staying within the contribution limits, you can receive tax benefits or save in the future when making qualified withdrawals.
Individual Retirement Annuity: Like a traditional or Roth IRA, account holders will open this form of IRA on their own. The only difference is that the funds are paid to a life insurance company in exchange for an annuity that will be paid out at a stated age.
SEP-IRA: A Simplified Employee Pension (SEP-IRA) is a traditional IRA that is set up by an employer for the employees. SEPs are often an employee benefit, and employers may contribute up to 15% of employees' compensation annually.
Group IRA: An Employer and Employee Association Trust is a Group IRA that is set up by employee associations for the employees who are members of the association.
SIMPLE-IRA: The SIMPLE-IRA stands for Savings Incentive Match Plan for Employees and is a traditional IRA offered by smaller employers where the employer will match contributions up to $6500 per year.
Spousal IRA: A traditional or Roth IRA that is funded by a spouse in the name of their partner. To qualify for this type of IRA the contributions must be less than $2000.
Inherited IRA: When the account holder of an IRA passes away, a non-spousal beneficiary will acquire what is referred to as an inherited IRA. The beneficiary cannot receive tax deductions for this IRA, and the proceeds must be distributed and taxed.
Rollover IRA: A qualified retirement plan can be rolled over into an IRA. By transferring the funds into a Rollover IRA, the account holder does not have to worry about being penalized for receiving a disbursement.
Education IRA: Also referred to as a EIRA, the Education IRA will allow you to contribute to the account so that you can save for higher education. The earnings can be withdrawn tax-free for qualified school expenses.
Now that you know your options, check the contribution limits and withdrawal guidelines so that you can determine which type of IRA is best for you and your family. As you can see, IRAs are not just limited to traditional and Roth accounts. See what your employer offers, determine the purposes of your savings, and select the most practical and beneficial account.