When we talk about IRAs, we tend to think of Traditional or Roth IRAs. Both are good savings vehicles for people who don’t have access to a 401(k) plan or who are self-employed, but did you know that there are other types of IRAs?
Designed for very small businesses or the self-employed, a Simplified Employee Pension plan (SEP) lets employers contribute money to Traditional IRAs for themselves and all their employees. A SEP plan can be ideal for small businesses because it has no start-up or operating costs. SEP IRAs also offer a high contribution limit—up to 25 percent of each employee’s pay. Another benefit is that SEP contributions can be increased in profitable years and reduced in leaner ones.
If you’re not familiar with SIMPLE IRAs, the name may be a little confusing. It doesn’t mean that the IRA is designed to be simpler than others. SIMPLE is an acronym for Savings Incentive Match Plan for Employees of Small Employers. This IRA is designed for employers (including the self-employed) with 100 employees or fewer. A SIMPLE IRA is different from a SEP plan because the majority of the contributions come from the company’s employees, although the employer is also required to make contributions.
Traditional IRAs are attractive because earnings aren’t taxed until you begin withdrawing funds from the account (as early as age 59½). IRA contributions use pre-tax dollars and are made during your prime earning years. Because you will likely withdraw the funds when you’re retired and in a lower tax bracket, your savings go further. Maximum annual contributions to a Traditional IRA range from $5,500 to $6,500 and are usually partially or fully tax deductible. Anyone under the age of 70½ with earned income can contribute funds to a Traditional IRA.
Like a Traditional IRA, a Roth IRA has a $5,500 contribution limit. It also has a catch-up policy that allows people 50 and older to contribute an extra $1,000 per year. Roth IRAs offer tax-free growth, but your contributions to the account are not tax deductible. The good news is that all distributions from a Roth IRA are tax-free. There are no age restrictions on a Roth IRA, but there are income restrictions, so you may want to talk to a financial advisor to see if a Roth IRA is right for you.
The First is here to help you with long-term financial planning. Visit http://www.fnbn.com/savings/individual-retirement-iras to find out more.
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