What are the basic differences among the IRA types?

When it comes to IRA’s, the four main types are Roth, Traditional, SEP and SIMPLE. The differences of these IRA’s can be great and before you decide which one is right for you, it is important to understand how they compare. The main things you will want to review to be able to appropriately evaluate and choose are:

  1. Tax implications, now and in the future
  2. Eligibility, age and income
  3. Rules on withdrawing, including penalties, restrictions and age requirements
  4. Beneficiary benefits

We have pulled together a few charts to help you with your comparison. If you are an individual looking to invest, most likely the chart comparing traditional and Roth will help you the most. If you are business or self-employed, you should review the chart that compares SEP and SIMPLE.

Traditional

Roth

Eligibility and age limits

You have taxable compensation
You must be under the age of 70 1/2

There are no age limits on eligibility
There are limits depending on your taxable income and varies on how you file your taxes (ie single, married etc)
If you are over the max below, you can’t contribute and for additional rules, check the IRS website:
married filing jointly/widowed: $196K +
married filing separately and lived with spouse at any time during the year: $10k +
single, head of household, married, filing separately and didn’t live with spouse this year: $133k +

Tax Implications

Contributions are tax deductible however your withdrawals in retirement are taxed at whatever the tax rate is at that time. There may be some exceptions if your spouse has a retirement plan too.

Contributions are not tax deductible however your earnings grow on a tax free basis

Contribution Limits under age 50

$5,500

$5,500

Contribution Limits for age 50 and over

$6,500

$6,500

Withdrawal before 59 1/2

A 10% tax penalty is applied to the total withdrawal

You can withdraw the money that you have contributed without having any tax penalty however, there is a 10% tax penalty applied to any earnings withdrawn

RMD’s

Starting at age 70 1/2 you will be required to start withdrawing

No, there are no requirements

Planning to pass down your IRA to a beneficiary

Person who inherited will pay taxes on distributions he/she takes

Person who inherited will not pay taxes on distributions he/she takes

source: https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1

SEP

SIMPLE

Business Eligibility

Designed for sole proprietors, partnerships, incorporated and unincorporated small businesses, including s-corps and individuals with self-employment income; Businesses with 1 or more employees are eligible.

Companies with a workforce of 100 or less and aren’t participating in any other qualified plan are eligible

Employee Eligibility

Employee is at least 21 years old, has worked for the employer at least 3 out of the last 5 years and has received at least $600 from the employer in the current year

Must have earned at least $5,000 during any 2 years prior to the calendar year of enrollment and expects to receive at least that amount during the current enrollment calendar year. Business can decide on less stringent requirement but not more.

Annual Funding Required

no annual funding required

Yes

Who funds it

Employer Only – this means the employer must fund each employees account and the employee doesn’t contribute anything.

Employer + Employee:
Employer can choose from two options:
1. Contribute 2% of each employee’s eligible compensation – this is called a non-elective contribution
2. Contribute a match that is up to 3% of what the employee is contributing, dollar for dollar. You have an option to lower this percent but can’t be reduced to less than 1% and it can only be reduced for 2 calendar years of the 5-year period ending with the calendar year the reduction is made effective.

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