These days, Americans hear a lot about the importance of saving for retirement, and individual retirement accounts (IRAs) are one way to do so. But the variety of these investments can be confusing.
A so-called “traditional” IRA requires you to deposit money before you pay taxes on it. It grows tax-deferred. When you withdraw it, it is taxed as ordinary income.
With a Roth IRA, you deposit after-tax money. It still grows tax-deferred. The difference is that withdrawals are tax-free in retirement.
In 2021, for both traditional and Roth IRAs, you can contribute $6,000 if you are under age 50 and $7,000 if you are older than age 50.
Which should you choose? A traditional IRA might be a good choice if you think you will be in a lower tax bracket in retirement. On the other hand, a Roth IRA might be a good choice if you think you will be in a higher tax bracket.
Also available are the SEP IRA or SIMPLE IRA, designed for individuals who are self-employed or operate a small business. In 2021, you can contribute 25% of your income (up to $58,000) to a SEP IRA. And for a SIMPLE IRA, contribution limits are $13,500 if you are under age 50 and $16,500 if you are 50 or older (some conditions apply).
That’s a lot of IRAs to consider. Do you need help choosing? Call or email us, and we can review your financial circumstances and make suggestions.