The Many Flavors of IRAs: Which Is for You?

Americans hear a lot these days about the importance of saving for retirement, and individual retirement accounts (IRAs) are one way to build a nest egg.

But the variety of these investments can be confusing, and you may need your advisor’s help to select the one that’s right for you. For example:

With a traditional IRA, you contribute pretax money, and it grows tax-deferred; you do not pay taxes on it until you withdraw it, at which time it is taxed as ordinary income.

On the other hand, with a Roth IRA, you contribute after-tax money. It still grows tax-deferred, and withdrawals are tax-free in retirement.

With both traditional and Roth IRAs, you can contribute $5,500 if you are under age 50, and $6,500 if you are older than age 50. Generally, you would choose a traditional IRA if you think you will be in a lower tax bracket in retirement and a Roth IRA if you think you will be in a higher tax bracket.

The SEP IRA is available to individuals who are self-employed or operate a small business. As with the traditional IRA, you contribute pretax funds, and withdrawals are taxed as ordinary income. The difference: the annual contribution limit is much higher. In 2017, you can contribute up to 25% of your income, to a $54,000 ceiling.

Also geared toward the self-employed and small-business owner is the SIMPLE IRA. You contribute pretax funds, and withdrawals are taxed as ordinary income, but the contribution limits are lower. They are $12,500 if you are under age 50, and $15,500 if you are 50 or older.

As a small-business owner, you can set up a SIMPLE IRA for your employees, who can elect to contribute. You’ll match their contributions according to one of two formulas. And if you’re self-employed with staff, you can contribute as both employer and employee.

Market-Timing Has Ups and Downs. And Expensive Risks…

We have seen volatility in the financial markets over the past year, and many investors believed they could take advantage of upswings or avoid downturns by timing the market. But does market-timing work?

Numerous forces drive the markets: economic measures, central-bank policy, and geopolitical events, to name just a few. The CBOE Volatility Index (VIX), which shows the degree of volatility the market may expect in a 30-day period, identifies events affecting the market and acts as a measure of risk.

For example, last year’s VIX spiked and dropped as it reflected events such as the drop in crude oil prices and Brexit. But despite some record spikes, most were short-lived, and 2016’s index closed quietly. Last year, most investors trying to time the market by buying and selling at “the right time” would have had difficulty predicting, and likely made more than a few mistakes.

Market-timing mistakes can be expensive. So instead of trying to time the market, most savvy investors plan well and stay the course. Diversification – the practice of spreading your investments among different asset classes and assets so your exposure to any one type is limited – can help reduce the volatility of your portfolio over time and provide you with an overall return that meets your comfort level.

It’s important to work with your advisor to develop an asset allocation that works for you over time. He or she is familiar with your individual circumstances, and can help you design a portfolio that stands the test of time.