Traditional Vs. Roth Vs. SEP IRA
Individual Retirement Accounts are savings accounts for you to use during your retirement. Three of the most common IRAs are Traditional, Roth and SEP, each with varying benefits for you and your designated beneficiary. Evaluate and understand the characteristics and benefits of each type of IRA if you are considering investing money in one or more of these accounts.
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Traditional IRA
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According to the Internal Revenue Service, a traditional IRA is any IRA that is not a SIMPLE or Roth IRA. Since 2009, IRS rules indicate that you can establish an IRA if you can contribute taxable income and you are not 70 1/2 at year's end. IRS rules for 2010 indicate that you are unable to contribute to your traditional IRA in the year you turn 70 1/2 and for any year after.
Traditional IRA Benefits
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If you open a traditional IRA and you are under the age of 50, you can make an annual maximum contribution of $5,000 to your account as long as your income remains above $5,000. The maximum annual contribution limit increases to $6,000 if you are 50 or older. In addition, the amount of contributions you make to your IRA is deductible on your federal income tax return, which helps reduce your taxable income.
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Roth IRA
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A Roth IRA is subject to the rules of traditional IRAs, but is structured as an annuity instead of a savings account. According to the IRS, the contributions you make to your Roth IRA are not deductible on your federal income tax return, but you can continue to make contributions as long as you live.
Roth IRA Benefits
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Although your contributions to Roth IRA are not tax deductible, income from withdrawals are not taxable. To avoid income tax from Roth IRA withdrawals, you have to own the IRA for 5 years and be at least 59 1/2 when you make the withdrawal. You may also withdraw from your Roth IRA tax free for one of the following qualifying reasons: to build or purchase a first home, you are disabled or the IRA is paid to a beneficiary at your death.
SIMPLE IRA
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A Savings Incentive Match Plan for Employees, or SIMPLE, IRA is a retirement plan useful for small business and self-employed workers to save for retirement. The plan is set up with an agreement to reduce your salary by a designated percentage. Employers deposit the proceeds from the salary reduction into a SIMPLE IRA for you.
SIMPLE IRA Benefits
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According to IRS rules for 2010, the maximum amount of SIMPLE IRA contributions is limited to $11,500 annually. The limit applies to employees and self-employed individuals. Money eligible for contribution must come from your wage, tips and other pay received from your employer. In addition, a SIMPLE IRA requires employers to match the amount of employee contributions. As of 2009, the maximum amount an employer can contribution is 3 percent of your salary.
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