If you are looking for effective investment vehicles that you can use to plan a comfortable retirement, you may be interested in learning more about Individual Retirement Accounts (IRAs). These are tax-advantaged accounts that you can use to save and invest for retirement. There are several types of IRAs available to consumers, including Roth IRAs, SEP IRAs, SIMPLE IRAs, and Traditional IRAs.
This is what you need to know before investing in an IRA.
What Is An IRA?
An IRA is a financial account that can be used to hold a range of financial products, including stocks, bonds, and exchange-traded funds. By establishing an IRA, you can save and invest money in a tax-advantaged way, allowing you to more quickly amass retirement assets. Each type of IRA has different rules, which we will elaborate on in the following section.
Types of IRAs
As mentioned earlier, there are four primary types of IRAs currently available. Each one has different advantages, so pay close attention and choose your IRA carefully.
These are the different types of IRAs:
People use traditional IRAs because in most cases, they are tax deductible. That means if someone puts $6,000 into a traditional IRA, their taxable income decreases by the amount of that contribution. The drawback to this is that when they withdraw the money from the account during retirement, their withdrawals will be taxed at their ordinary income tax rate.
As of 2021, people younger than 50 are only allowed to contribute a maximum of $6,000 to their traditional IRAs. People above that age could contribute a maximum of $7,000.
Whether the income you contribute to your traditional IRA is tax deductible varies based on circumstances. To learn what will apply in your situation, speak to one of Avina Financial Group’s talented representatives.
Unlike traditional IRAs, Roth IRAs do not have tax deductible contributions listed as one of their benefits. Though, qualified distributions are tax-free with these accounts. That means when you contribute to a Roth IRA using dollars that you’ve already paid tax on, you can withdraw those funds during retirement without incurring any income taxes.
If you don’t need the money, you can leave it in the account and continue contributing to it. No matter how old you are, you can continue contributing to the account as long as you have eligible earned income. Though, there are limits to how much you can contribute in a given year. The contribution limits are the same as the Traditional IRA.
SEP stands for Simplified employee pension. These plans adhere to the same taxation rules as traditional IRAs do, but contributions are limited to 25% of compensation or $58,000. These accounts benefit business owners, because they can deduct contributions made on behalf of their employees from their taxes. Though, employees cannot contribute to these accounts, making them a difficult option for individuals to access.
SIMPLE IRAs are designed to allow employees to make standard contributions to their retirement account. Unlike SEP IRAs, employees can make contributions alongside their employers. Another difference between the two plans is that SIMPLE IRAs require employers to make contributions. All of the contributions to these plans are tax deductible, which may push the employee or business into a lower tax bracket.
Choose The Right IRA
Individuals who are looking for IRAs can trust Avina Financial Group to help them find the right option. Likewise, if you are a business owner thinking about implementing a SIMPLE or SEP IRA plan, get in touch with us now. We can help you find the right IRA for your personal or commercial needs.