There are many types of IRAs you can choose from and that’s why this article is here, to help you choose the best one for you. But we warned that we will talk only about 4 types of IRAs to avoid this article being 3 hours long.
Traditional IRA
These IRAs accounts are often tax-deductible. Which means that if you contribute to this account $10,000 it could reduce the amount of your taxable income by $10,000. Sounds good right ?
But if you want to withdraw money from these accounts then they are taxable as ordinary income.
There are also limits for contribution to a traditional IRAs. In 2020 and 2021 that limit is $6,000 per year. And for people over 50 years of age it is up to $7,000 per year.
And if you have a retirement plan at work, then the amount of your traditional IRA contribution is reduced or eliminated altogether once you hit a certain income. You can still contribute to IRA but it won’t be tax-deductible.
Roth IRA
Contributions to these accounts aren’t tax-deductible but when you withdraw money from these accounts then they are tax-free and there are no taxes on investment gains.
These accounts doesn’t have RMDs. So keep that in mind. But you can contribute to these accounts at any age as long as you have earned income.
But these accounts also have income limits. In 2021 the contribution limit is $6,000 for under 50 years of age and $7,000 when you are over 50 years of age. And it also have modified adjusted gross incomes below $140,000 for single filers and $208,000 for married filing jointly.
SIMPLE IRA
SIMPLE IRAs stands for “Savings Incentive Match Plan for Employees Individual Retirement Accounts”.
These accounts are mainly for small businesses with fewer than 100 employees.
The contributions in these accounts are also tax-deductible. In these accounts your investments grows tax-deferred until retirement, when distributions are taxed as income.
These accounts have also contribution limits as of 2021 the limit is $13,500 per year for those under age of 50. People over the age of 50 have the limit of $16,500 per year.
SEP IRA
These accounts are basically IRAs for self-employed people or small-business owners with few or no employees.
The contributions in these accounts are also tax-deductible. And the investments in these accounts grow tax-deferred until retirement when the distributions are taxed as income.
These accounts has also contribution limits as of 2021 the limit is up to $58,000. And there’s no catch-up contribution at age 50+ for these accounts
However these accounts require proportional contributions for each eligible employee if business owners contribute for themselves.
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