How to Structure an IRA
An IRA, according to IRS definitions, is an individual retirement arrangement, often referred to as an individual retirement account. When you are opening an IRA, consider your immediate tax needs and long-term objectives to properly structure it. There are essentially five IRA structures: traditional IRA, Roth IRA, education IRA, SEP (simplified employee pension) IRA and Simple IRA. Finding the right structure is essential in getting the greatest benefits from your IRA investment.
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Instructions
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Understand your tax objectives. If you need a tax deduction immediately, then you will want to look at setting up a traditional, SEP or Simple IRA. If you want the money to be tax-fee at a later point, consider the Roth or education IRA.
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Look at the tax-deferred options and determine whether you are able to create greater benefit from a SEP or Simple IRA as opposed to a traditional IRA. The SEP and Simple plans are designed for business owners who want to place more for retirement for themselves while helping employees save.
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Evaluate whether you want to solely provide contributions, or whether employees will be able to contribute as well. In a SEP, employers can contribute to employee accounts up to 15 percent of each employee's salary. Simple IRAs allow employees to place up to 100 percent of earned income, up to $6,500 annually, into the plan.
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Consult with your tax adviser about your objectives, and whether they are the most suitable for your current situation. Some people start with their tax adviser first, but this leaves them strictly relying on their recommendation. By investigating your options before talking to your adviser, you will be better prepared to open an IRA structure that meets your needs.
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Tips & Warnings
Roth IRAs grow tax-free if you hold them at least five years and until age 59 1/2. You get no tax deduction for the contribution.
Education IRAs allow you to save up to $500 annually toward education costs. Money used for education can be taken out tax-free, but there is no deduction for the contribution.
Traditional, SEP and Simple IRAs allow you to deduct the contribution from your taxes in the year you make the contribution. When money is pulled out after age 59 1/2, the distribution is added to your adjusted gross income.
