Investing Savings

Choosing the Right IRA for You

If you’ve started exploring IRAs, you may have noticed there are a few different kinds out there. Before you open an account, it’s a good idea to learn about each to determine which is right for you. It’s always a good idea to speak with an advisor where you are opening your account to describe your situation and goals so they can help you choose the best option for you. Traditional IRA Any contribution you make will lower your taxable income for that year. You won’t be taxed initially, but you will be taxed when you withdraw the funds based on your tax bracket the year you withdraw. However, when you retire, you may be earning less money (this is generally the case), which puts you at a lower income tax bracket than you would be in when you were investing into your IRA during your career. Any money withdrawn before you are 59.5 will cost you an additional 10 percent penalty plus the taxes on the amount you withdraw. There are specific circumstances where you might be able to avoid the withdrawal penalty. These include: $10,000 towards your first-time home purchase, paying for college expenses for yourself, your spouse, children and grandchildren, paying for costs of a sudden disability and paying for medical expenses that are 7.5 percent greater than your adjusted gross income. Roth IRA Any contribution made is not tax deductible, unlike a Traditional IRA. However, you won’t pay taxes when you withdraw your money. This is the main difference between a Traditional IRA and a Roth IRA. You can withdraw contributions (what you put in) without a penalty, but you can’t withdraw earnings on your investments before age 59.5. If you do withdraw the earnings, you’ll get that same 10 percent penalty you do with a Traditional IRA. Another difference between a Roth IRA and Traditional IRA is that with the Traditional, you must start making required minimum distributions (i.e. withdrawals) at age 70.5, but you can let it sit with a Roth. Likewise, with a Roth IRA, you can continue to make contributions after turning 70.5 years old, but you can’t with a Traditional IRA. There are specific income requirements for a Roth IRA. It can change yearly, but let’s use 2016 for an example. Your modified adjusted gross income (total of your household’s income before taxes plus any tax-exempt interest income) needs to be $184,000 or less if you are married and filing jointly and $117,000 or less if you’re single or married but did not live with your spouse that year. SEP IRA SEP IRA stands for Simplified Employee Pension. These are designed for self-employed people or if you own your own small business. Like the Traditional IRA, contributions are tax-deductible and you won't get taxed until you remove the funds. What makes a SEP IRA unique is the contribution limit, which is higher than a Roth or Traditional IRA. In 2016, if you owned your own business, you can contribute 25 percent of your income or $53,000, whichever is less. SIMPLE IRA A SIMPLE IRA stands for Savings Incentive Match Program for Employees. This plan is for self-employed people and small businesses. What separates a SIMPLE IRA from a SEP IRA is that employees can contribute to this as well. With a SIMPLE IRA, an employer is responsible for matching each contribution an employee makes (up to a certain percentage).