Planning for retirement is difficult. You’re ready to invest your money, but you’re never sure where to start. What makes this task more challenging is the fact there is more than one type of retirement account floating around out there. Even more perplexing, there are 11 types of IRA’s. And if you weren’t sure, this doesn’t include accounts like 401(k)’s. In fact, they’re entirely different.
An Individual Retirement Account (IRA) is linked to a broker, bank, or other financial institution. Typically, these contributions are invested in CDs, stocks or bonds, and several additional securities.
So, if you’re interested in setting up an IRA, here are the 8 types you should be aware of:
A Traditional IRA allows individuals to contribute on pre-tax basis. But once the accountholder turns 70 ½, they are required to take out required minimum distributions (RMD). If the individual doesn’t withdrawal RMD’s at the required age, they will be hit with a 50 percent penalty of the amount they didn’t withdraw. Taxes do not apply to IRAs until withdrawals begin. In some cases, contributions are even tax deductible. IRA’s have a contribution limit of $5,500 per year. If an individual is over the age of 50, he or she can make catch-up contributions, which gives a higher contribution limit of $6,500 per year.
A Roth IRA is not tax-deductible because contributions are made on an after-tax basis. However, dependent upon specific situations, one may qualify for a tax credit. Roth IRA’s are taxed differently than traditional IRA’s. Contributions to a Roth IRA are taxed each filing year, but withdrawals are not taxed. To qualify for a Roth IRA, you must earn a certain amount of income. If an accountholder is over the age of 70 ½, he or she can still make contributions to this account, and RMD’s are not required. All contributions to a Roth IRA must be made with a cash or check, they cannot come from other securities.
A Conduit IRA is intended to be a placeholder for funds coming from a qualified plan. Those who use this type of plan are often waiting to place his or her assets in a new qualified plan offered by an employer. Conduit IRA’s have no contribution limit on the funds transferred to the account.
An Inherited IRA is passed down to a beneficiary after an owner’s death. If the owner was collecting RMD’s from the IRA, the beneficiary must continue to take out the distributions or set it up based on his or her own life. Only spouses who inherit an IRA can do a rollover to his or her own account.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is an employer sponsored retirement plan for small companies employing less than 100 workers. Companies can contribute to the plan by choosing one of two options: They can make a matching contribution or contribute a fixed rate of 2% to all employees eligible. The current contribution limit for employees under the age of 50 cannot exceed $12,500 and those over 50 can make catch-up contributions of an additional $3,000 per year. SIMPLE IRA owner must participate in RMD’s and the distributions are not taxed until the year they are withdrawn.
An Individual Retirement Annuity is much like an IRA, but it’s a purchased contract based upon a specific number of conditions. The annuity must be issued in the name of the owner and the only recipients to benefit from distributions are the owner and his or her beneficiaries if the owner dies. The balance cannot be transferred to others. Before distributions can begin, the annuity must be fully vested. The distributions must begin on April 1st on the year the owner is 70 ½.
A Spousal IRA is a retirement account set up for spouses who don’t work and make little or no income. The working spouse can make contributions to the IRA on their partner’s behalf. To qualify for this type of IRA individuals must be married, file jointly on income-taxes, and earn an income that is at least the amount contributed to the account. The contribution limits are the same as a Traditional and Roth IRA, as well as RMD’s.
An Education IRA (EIRA) is a college savings plan meant to be withdrawn from for educational purposes only. The deductions are tax-free, but the contributions in an EIRA are not tax deductible. This account is for a child who is under age 18.
The content provided is for information and/or educational purposes only. EF Hutton does not provide opinions, tax, legal, or accounting advice. This article is the view of the author and does not necessarily represent the view of EF Hutton and affiliates. Before engaging in any transaction, you should consult with your tax, accounting, and legal professionals. The information contained in this article is not an offer, solicitation of an offer, or advice to buy or sell securities, or endorsement of any investment strategy. Before investing, consider your investment objectives, risk tolerance and EF Hutton charges and expenses. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature.
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