Which IRA is Right for You?
Traditional IRAs are an excellent tax-advantaged option for building your retirement savings and not paying taxes on your earnings until distribution, enabling you to take full advantage of an IRAs compounding benefits. Contributions to Traditional IRAs are tax deductible up to certain income limitations, and even if your contribution becomes non-deductible, it still makes sense to contribute simply for the tax-deferral benefits.
Withdrawals from Traditional IRAs prior to age 59½ may result in a 10% IRS penalty tax in addition to current income tax.
Contributions to a Roth IRA, including assets converted from a Traditional IRA, are made with after-tax dollars, up to certain income limitations. However, the benefits of a Roth IRA come from its potential for tax-free distribution of your accumulated earnings at retirement.
Roth IRAs offer tax deferral on any earnings in the account, and withdrawals from the account may be tax-free, as long as they are considered qualified distributions. Limitations and restrictions may apply. Account withdrawals made before or up to age 59½, or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs.
Coverdell Education Savings Accounts or Education IRAs
Coverdell Education Savings Accounts are a great option for adults to put money away for a child’s future college expenses. Earnings in ESAs are tax-deferred and withdrawals for qualified education expenses are tax-free. Up to $2,000 annually may be contributed on behalf of a child until the child reaches age 18, assuming the contributor meets certain income limitations.
SIMPLE IRAs enable small business owners and their eligible employees to defer a portion of their pay and invest it in a tax-deferred retirement account.
SEP IRAs are designed for self-employed individuals, partnerships, corporations or tax-exempt entities to make tax deductible contributions into the SEP IRAs set up by all eligible employees.
Consult your tax advisor regarding tax consequences and for more information regarding the contribution limits and income restrictions applicable to each type of IRA account.