Conjecture has it that societal and market variables introduced by COVID-19 may cause Social Security funds to disappear by 2028. If that occurs, are you prepared to retire afterward without a social insurance program in place?
Many investment plans do exist to enable saving for retirement. One such plan is the Individual Retirement Account (IRA).
What is an IRA? It is a personal savings and investment account. Unlike traditional savings accounts, IRAs enjoy different tax governances that encourage long-term growth. There are also many types of IRAs that offer unique advantages and cater to different investors.
Types of IRAs
Perhaps the four most common types of IRAs are Traditional, Roth, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE).
IRAs can be opened with Internal Revenue Service (IRS) approved institutions. These institutions, such as banks, credit unions, and brokers, become custodians for your IRA. An IRA custodian can advise on relevant IRA accounts and assist in developing personalized investment plans.
A Traditional IRA possesses the title of “traditional” because it has existed the longest and still remains popular.
Traditional IRAs allow for a yearly investment of $6,000 from untaxed income. This investment is also tax-deductible if you are not simultaneously enrolled in an employee retirement plan.
When it does come time to retire though, withdrawals from a Traditional IRA will be taxed at your current tax rate. Therefore, Traditional IRAs aid those who do not already have workplace investment plans. They also benefit those who anticipate retiring in a lower tax bracket.
Roth IRAs emerged in 1997 as an alternative to the Traditional IRA.
Roth IRAs allow for a yearly contribution of $6,000 from taxed income. However, when withdrawn, there will be no additional taxes on your investment or its earnings.
Roth IRAs benefit those who may need to withdraw money from the account earlier than retirement. Conversely to Traditional IRAs, Roth IRAs are better for those who expect to retire in a higher tax bracket.
SEP-IRAs are similar to Traditional IRAs, but they cater to self-employed individuals or small business owners.
Employers contribute a percentage of their own salary to all employee accounts. The employer may contribute 25% of their income up to $58,000. Part of the incentive for employers to do so is the receipt of tax benefits.
Although employees may not contribute to their accounts, they do have control over their investments. Withdrawals are taxed just like Traditional IRAs.
SIMPLE IRAs are also viable options for small businesses. They differ from SEP-IRAs by allowing for employee contributions to their accounts. Employee investments to a SIMPLE IRA account are matched by mandatory employer contributions.
Contribution limits are $13,500 per year and participants can transfer money to a Traditional IRA after two years.
These details about the various types of IRAs provide only an initial understanding. There is so much more to learn about retirement planning and investment strategies.
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