The Various Types of IRAs

IRAs are valuable for retirement savings and offer tax benefits that you can leverage today. The specific advantages depend on the IRA type chosen.

Traditional IRAs

Traditional IRAs support two contribution categories:

Deductible Contributions

Eligibility requires either no active participation in an employer plan or active participation with AGI below specified thresholds (which vary annually). Benefits include reducing current tax liability. Annual contribution limits are $5,500 (under 50) or $6,500 (age 50+). Earnings grow tax-deferred until withdrawal, with a 10% penalty for distributions before age 59½. Required minimum distributions begin at age 70½, and every dollar of a deductible contribution is taxed in full upon withdrawal.

Nondeductible Contributions

Available regardless of employer plan participation or income level, these contributions don't reduce current taxes. However, earnings remain tax-deferred and are taxed upon distribution, while contributions themselves avoid taxation since taxes were already paid.

Roth IRAs

Roth IRAs offer superior tax treatment compared to nondeductible traditional IRAs. Contribution limits match traditional IRAs but aren't deductible. Earnings become tax-free upon distribution if five years have elapsed since the first contribution AND the account holder reaches 59½, experiences death/disability, or withdraws up to $10,000 for first-time homebuyer expenses.

Key advantages include no mandatory minimum distributions at any age and the ability to make contributions after age 70½, making the Roth IRA a good wealth building tool for families.

SEP-IRA and SIMPLE IRA

These plans suit small businesses offering employee retirement benefits. Contributions occur in employee names without annual limits like traditional or Roth IRAs. Distribution rules follow deductible IRA taxation principles.

Professional Guidance Available

The firm encourages consulting professionals regarding IRA selection, noting that rules and limits change periodically.