Understanding Your IRA Options

A traditional IRA is a way to save for retirement, up to $7,000 a year (as of 2024). Those age 50+ may add another $1,000. According to the IRS, contributions may be “fully or partially deductible, depending on your filing status and income.“ Your account will grow tax-deferred. That means you won’t pay taxes until you make a withdrawal at age 59 ½ or later (to avoid a 10% early distribution penalty). Then, your withdrawals will be taxed at your tax rate at the time you take money out. Since most people have less income at retirement, it’s likely you’d also pay less in taxes.

A Roth IRA also allows you to set up a retirement fund, up to $7,000 a year (as of 2024). Those age 50+ may add another $1,000. The money in a Roth account will grow tax-free. Although contributions aren’t deductible, you won’t pay income taxes when you make withdrawals, if you satisfy the requirements. One key difference is you’re allowed to withdraw the amount you contributed without penalty at any time. But, your earnings can only be withdrawn after age 59 ½ and 5 years after your first contribution, if you want to avoid a penalty. Plus, unlike other types of IRAs, you aren’t required to make withdrawals during your lifetime. Your heirs will be required to make withdrawals after your passing.

A SEP is a retirement account that business owners set up for themselves and for their employees. According to the IRS, SEP IRAs follow the same rules for investment, distribution and rollovers as traditional IRAs. But, only employers can make contributions. These contributions are tax deductible for employers, and employees won’t pay taxes until they make withdrawals. Contributions are limited to the lesser of 25% of compensation or $69,000, as of 2024. Some participation rules apply. Contributions are vested immediately to participants, so contributions and earnings can’t be forfeited back to the plan if you’re no longer employed with that company.

The term “rollover IRA” isn’t a different kind of IRA. Some people use it to describe an IRA that’s used to receive funds from another retirement account. One example is if you leave a job and decide to move your 401(k) to your traditional IRA, since they have similar tax treatments. That’s known as “rolling over” the funds. You should know that some limitations do apply, so consult your tax advisor for more information.

If you put money in multiple IRA accounts, the combined total contribution you can make for all IRAs must be below the limits noted previously. For example, if you have a traditional and a Roth IRA, you can only contribute a total of $7,000, split between the 2 accounts.