Get Your Money Right: an IRA That Works for You

Most people are familiar with IRAs, but if you were to ask them exactly what kind of IRA would be best for them, you may get a blank stare or two. So, this is to clear up any confusion you may have about IRAs and to give you some insight for which one you should choose to invest in depending on your individual circumstances.

First of all, IRA stands for Individual Retirement Account. It allows you to contribute money/funds over the course of a career or even longer to ensure your financial stability upon retirement. That’s the easy part. Next comes the choice of what kind of IRA to open. Here are the four most popular types of IRAs:

Traditional IRA – Allows you to contribute up to $4,000 annually before taxes, which reduces your taxable income. The money is taxed when you start to withdraw after the age of 65. This particular IRA is also good for those that need help with not dipping into the fund early. There are penalties for early withdrawals, and some providers won’t let you withdraw early at all. Also, you have to start taking money out by the age of 70 or the IRS will take the money away.

Roth IRA – Has a contribution limit of $5,000 a year. You deposit money in after taxes, so when you withdraw at retirement you are not taxed on the money or the growth of the fund. You can also withdraw from the account any time before five years of the account being open without getting penalized. Plus, there is no mandatory withdrawal age, so you can go the rest of your life without using the money and it won’t get touched. This is a good way to leave your money to those you love.

SEP (Simplified Employee Pension) IRA - This is an employer-established and funded IRA. The employer can put up to 15% of your compensation into a special IRA account. You can also do this for yourself if you own a business. These have fewer administrative and tax filing requirements than most retirement plans, which makes them more attractive than 401(K)s.

Simple IRA - This is a new creation, but is gaining popularity. It is employer-sponsored just like the SEP IRA but this particular IRA allows the employer AND the employees to contribute to the account. Employees can contribute up to 100%, but no more than $6,500 per year, into the IRA. There are rules that require employers to contribute a certain amount to the IRAs they open for their employees, and premature distribution penalties apply. Once you get all of that in check, this is great way to start setting up for retirement.

While these are the main types of IRAs, there are others to be considered based on your financial goals. Always do your own research and talk to a financial advisor for more info. Starting an IRA that fits your lifestyle is a great way to get your money right!