Deciding which IRA Works Best for You

Deciding which type of IRA works best for your estate plan can be challenging. While Roth and traditional IRAs are the most common types of retirement accounts, there are other options that you should consider as well. These lesser-known accounts can provide numerous tax advantages based on a person’s situation. This article reviews the six most common types so that you can begin considering which retirement account works best for you.


# 1 – Traditional IRAs


The most popular type of retirement savings account, there are several reasons why traditional IRAs are so common. Contributions are deductible from a person’s current income and consequently lower the individual’s taxable income for a year. Withdrawals from the account are then taxed at the tax rate at that time. 


Traditional IRAs are best for people who are in a higher tax bracket than they will be during retirement. These accounts also work well for workers who are not presented with work-sponsored retirement accounts.


# 2 – Roth IRAs


Roth IRAs are also a very common choice among retirement accounts. Even though contributions to Roth IRAs are not deductible, withdrawals made during retirement are completely tax-free. A person’s eligibility to contribute to a Roth IRA is based on that individual’s income. 


Withdrawal rules from Roth IRAs are more lenient and allow both tax-free and penalty-free withdrawals of contributions at any time. These accounts are best for people who anticipate being in a higher tax bracket when they retire.


# 3 – SEP IRAs


Simplified employee pension (SEP) IRAs are established for employees by employers.  Earnings placed in SEP IRAs grow tax-free and distributions in retirement are taxed. These accounts are best for small business owners who want to start-up and operation costs associated with conventional retirement accounts.


# 4 – Nondeductible IRAs


While traditional IRA contributes are taxable, contributions to these accounts are not. Instead, contributions to nondeductible IRAs are made using after-tax dollars. A person who uses these accounts, however, still receives the advantage of tax-deferred growth on earnings that are placed inside of the account. 


# 5 – Spousal IRAs


A person must have earned income to be eligible to contribute to an IRA account, but if one spouse isn’t working or brings in very low income then it is possible to contribute to separate IRAs. These accounts are funded with money from either spouse’s earnings but must be opened in the non-working spouse’s name. 


# 6 – Simple IRAs


Simple (Savings Incentive Match Plan for Employees) IRAs are similar to employer-sponsored 401(k)s. These accounts exist primarily for small companies as well as the self-employed. Unlike SEP IRAs, employees are allowed to contribute to these accounts through salary deferral. It is worth understanding that contribution limits for simple IRAs are lower than for 401(k)s.


Speak with an Experienced Estate Planning

To learn more about retirement accounts and which works best for you, one of the best steps that you can take is to speak with an experienced estate planning lawyer. Contact Ettinger Estate Planning today to schedule a free case evaluation.

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