In this article we will be summarizing several of the most common types of IRA’s.
Disclaimer: The below is for educational purposes only. Please consult your CPA or tax adviser for the proper strategy for your situation.
Traditional IRA
- The most popular of individual tax-advantaged retirement savings accounts.
- Contributions are typically tax deductible depending on your income and filing status.
- Earnings are not taxed as long as money remains in the account.
- Withdrawals are taxed at your tax rate at the time of withdrawal.
Recommended for people who believe they are in a higher tax bracket currently instead of in retirement. In many cases this does not make a lot of sense, since we want our standard of living to go up during retirement not down.
Roth IRA
- Contributions are not tax deductible, you pay tax upfront on the contributions.
- When the time comes, qualified withdrawals are completely tax free.
- Penalties and taxes apply to pre-retirement withdrawals with a few exceptions.
Recommended for people who believe they will be in a higher tax bracket in retirement and for people who may need access to their contributions before retirement age. Also for folks who prefer to pay tax now instead of later.
SEP IRA (simplified employee pension)
- Setup and funded by an employer for employees giving the employer tax benefits.
- Distributions in retirement are taxed.
- Higher annual contribution limits than other retirement accounts. 25% of employee compensation or $55,000, whichever is less. Self-employed limits differ.
- Employer has to contribute equally to all employee accounts including their own.
- Based on the businesses cash flow contributions may vary but must remain equal for all employees.
Recommended for small business owners with employees who want to avoid start up and operations costs of traditional IRA’s and to take advantage of increased retirement contribution limits.
Solo 401(k)
- Very similar to the SEP IRA above. However this is for business which have no employees, only owners.
- This means if you have a legitimate business you can open this account and contribute up to $55,000 per year in earnings. The contributed funds must come from the business, not any other source. This type of account can also be switched to a self directed account.
Self-Directed IRA
- Self-Directed IRA in ROTH or Traditional format have the same rules and regulations except for one major difference: The type of investments you can buy in the account.
- Regular IRA’s limit investments to stocks, bonds and mutual funds. With a self-directed IRA you can own a variety of things. Assets like real estate, real estate notes, private notes and many more items such as gold and even privately held companies.
You need to setup a self-directed IRA with a trustee or custodian to make sure you remain compliant with IRS rules. Inside a self directed IRA, you can also have versions of the ROTH and traditional accounts. Self directed simply means you can buy the types of assets that interest you, not what Wall Street wants you to buy.
Self-Directed Solo 401(k)
- This is for the business owner with no employees.
- Very much like the Solo 401(k), only self directed.
There are many rules and regulations like “self-dealing” which can trigger penalties and taxes if you violate the rules. Be sure and educate yourself on this topic, in addition to getting qualified advice from your CPA or select a qualified IRA custodian to assist you.
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