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.