Use this guide help you choose the Individual Retirement Account (IRA) type that best suits your needs.
Traditional IRA
What it’s all about:
The traditional IRA will offer most individuals an upfront tax break.
Pros:
- Contributions aren’t taxed.
- Contributions may be tax-deductible and lower your taxable income a lot.
- Investment earnings aren’t taxed.
- No income limits for contributors
Cons:
- Withdrawals are taxed at your tax rate during retirement.
- At age 70 ½, you are no longer allowed to make contributions. At that time, you must also begin taking distributions even if you are still employed.
Traditional IRAs might be the best choice for:
- Individuals currently in a higher tax bracket than they anticipate being in during retirement
- Employees who don’t have access to a workplace-sponsored retirement plan
Roth IRA
What it’s all about:
A Roth IRA does not allow for tax-deductible contributions, but withdrawals are tax-free.
Pros:
- Tax-free withdrawals
- Age limit for making contributions
Cons:
- Income limits for eligible contributors
- Contributions and growth are taxed.
- Contributions are not tax-deductible.
Roth IRAs might be the best choice for:
- Individuals who anticipate being in a higher tax bracket during retirement
- Individuals who may need access to their savings before they retire
SEP IRA
What it’s all about:
Simplified Employee Pension (SEP) IRAs are a traditional IRA for individuals who have been employed in their place of work for at least three of the past five years.
Pros:
- Earnings can grow tax-free.
- Tax benefits for employer
- Higher annual contribution limits than traditional IRAs
Cons:
- Contribution limits can vary each year based on the business’s cash flow.
- There are no catch-up contributions allowed for workers aged 50+.
SEP IRAs might be the best choice for:
- Small-business owners who want to avoid the heavy costs associated with conventional retirement plans
Spousal IRA
What it’s all about:
An IRA (either traditional or Roth) for married couples who aren’t both eligible for a traditional retirement account.
Pros:
- Non-working or low-earning spouses can open a retirement fund.
Cons:
- Contribution limits are based on working spouse’s income.
Spousal IRAs might be the best choice for:
- Low-income or non-working individuals married to high-income spouses.
