An IRA is an account for individuals. Whether or not they have an employer 401K program that they’re contributing to already, or if they just want to save more money for retirement. There are a lot of reasons why people choose to open an IRA, but the main reason is independence. You’re given a choice in what you’re invested in, how much you contribute (although there are contribution limits), IRAs will have you covered.
There are a handful of IRA types you can choose from, and it all depends on what you want.
When you make contributions into a Traditional IRA, the money goes into your account tax-deferred. That means that when you start taking monthly distributions, your money is taxed as income. It will look very similar to a paycheck that you receive now. The age that the IRS allows distributions is 59½. Any age before then, and you might be subject to a 10% penalty fee.
Roth IRA types give savers the opportunity to contribute after-taxes money into their IRA. The benefit of this, unlike the Traditional IRA, is that your distributions are not taxed as income when you receive it. Taking a distribution before age 59½ is also subject to a 10% penalty, same as a Traditional IRA.
This is where things might get a bit confusing if you’re new in this business. A self-directed IRA is pretty much as it sounds. An IRA, that you self-direct, right? Essentially, yes. But the thing is that your SDIRA can be either a Traditional IRA or a Roth IRA. And you’re also allowed to invest in (almost) anything you want to. There are assets you’re forbidden to invest in, like collectibles, gems, life insurance, or any investment with family members. There is more that’s prohibited, but once you learn to maneuver, your options are endless.
This stands for Simplified Employee Pension Plan. So to put it simply, a SEP IRA is established by an employer, or by someone who is self-employed. What happens is that your employer will make tax-deductible contributions into your SEP IRA on your behalf. The business owner who opened up this account is also allowed to contribute to their own SEP IRA.
This plan is most beneficial for small business owners, or start-ups who want to entice talent with a retirement savings account, which can be fairly rare.