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Types of IRA

Table of Content:

Last updated on March 24th, 2020
Written by: Rick Pendykoski

What are the different types of IRAs and which is best for you? The type of IRAs is as follows traditional IRA, Roth IRA, SEP IRA, Simple IRA, HSA, ESA,Self Directed IRA, Non-deductible IRA, Sposural IRA, Inherited retirement account and rollover IRA as of 2020, but we have classified these IRAs into three groups of plans for your better understanding and selection as per your requirement.

INDIVIDUAL PLANS

  1. Traditional IRA
    A traditional IRA is a tax-advantaged retirement savings account that allows individuals to save tax-deferred money for retirement. Contributions are tax deductible, and the funds grow tax-deferred under the protection of the account until withdrawals are made.Who it’s best for: People in the higher tax bracket and workers who are not eligible or do not have access to an employer-sponsored retirement plan.Tax treatment: If the employer hasn’t covered the employee with a retirement plan, the employee can deduct the full amount of the contribution on the tax return.
  2. Roth IRA
    A Roth IRA is an individual retirement account wherein the contributions made are with after-tax dollars. All earnings, including capital gains, interest, and dividend income, grow tax-deferred until the Roth age rules kick in then tax deferred changes to tax free!Who it’s best for: Individuals who expect to be in a higher tax bracket in retirement and low and middle-income workers, who might need to access some of the money before they reach their retirement age.Tax treatment: Contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.

SMALL BUSINESS PLANS

  1. SEP IRA
    A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is a tax-deferred retirement plan adopted by business owners to provide retirement benefits for their employees and for themselves.
    Who it’s best for: Small business owners who want to offer retirement plans to their employees and supersize their retirement stash while getting a tax deduction on any contributions made for employees.
    Tax treatment: The contributions made to this account are tax-deductible.
  2. Simple IRA
    A savings incentive match plan for employees (SIMPLE) IRA is a tax-deferred retirement plan for small-business owners with employees less than 100. In a SIMPLE IRA, the employer is required to make contributions either on their own or to match the employee’s contributions.
    Who it’s best for: Small-business owners who want to make tax-deferred contributions to an employee’s plan.
    Tax treatment: Contributions are tax-deductible and required every year.

OTHER PLANS

  1. Health Savings Account (HSA) Created in 2003
    A Health Savings Account (HSA) is a tax-advantaged savings plan that combines with a high deductible health plan (HDHP) to help people save money on healthcare costs. The contributions are accumulated over time until the money is needed on a tax-free basis to pay for qualified medical expenses.Who it’s best for: People who are covered by a high deductible health plan and not enrolled in Medicare and not claimed as a dependent on someone else’s tax returnTax Treatment: The deductions to fund an HSA are tax deductible
  2. ESA (Education Savings Account)/Education IRA (EIRA)
    More commonly known as the Coverdell Education Savings Account (ESA), this education IRA is a tax-advantaged account that is used to pay a beneficiary or child’s qualified education expenses on a tax-free basis.Who it’s best for: People who like making specific investments, or may need the money to pay for the education expenses before the beneficiary or the child gets to college.Tax Treatment: Contributions made are not tax-deductible; however, the earnings grow tax-free.
  3. Self-Directed IRA
    A self-directed IRA is a variation of traditional or Roth IRA that allows people to save for retirement on a tax-advantaged basis. This type of IRA allows the account holder to invest or own a variety of assets, including real estate that is generally prohibited from regular IRAs.Who it’s best for: Savvy investors who want to explore the non-traditional businesses and alternative investment options such as real estate.Tax treatment: It depends on the type of self-directed IRA to which contributions are made. In Self-Directed Roth IRA, contributions are not tax-deductible, and in traditional Self-Directed IRAs contributions may be tax-deductible.
  4. Non-deductible IRA
    A non-deductible IRA is a retirement plan that doesn’t allow individuals to deduct their contributions from their income taxes as a traditional IRA would allow. However, the non-deductible contributions grow tax-free.Who it’s best for: Those who are not eligible to fund a Roth IRA or a deductible IRA.Tax treatment: Contributions are made with after-tax dollars
  5. Spousal IRA
    A spousal IRA is a strategy that allows a working spouse to make contributions to an IRA that’s in the name of a non-working spouse. This is an exception to the rule that the account holder has to have earned income to contribute to an IRA.Who it’s best for: Non-working or low-income earning spouses.Tax treatment: Contributions are tax-deductible.
  6. Inherited Retirement Accounts
    An inherited IRA is also referred to as a beneficiary IRA. This type of account is opened when a person inherits an employer-sponsored retirement plan or an IRA upon the death of the original owner. A beneficiary, spouse, relative, or an unrelated party or entity can inherit the IRA. However, the tax laws around inherited IRAs have always been complicated, but since the Secure Act has come into effect, these laws have become even more complicated.Who it’s best for: Because this is an inherited account – almost anyone allowed to be a beneficiaryTax Treatment: Without giving tax advice – the beneficiary has to play by the same rules of the original IRA owner. The secure act of 2019 has radically changed the old S-T-E-T-C -H provisions which were law until Jan 1st of 2020. The IRS now wants RMD’s to be paid out over ten years instead of the lifetime of the beneficiary. This has a many faceted hardship for the beneficiary. At Self Directed Plans LLC – we have solutions to retain the S-T-R-E-T-C-H options.
  7. Rollover IRA
    A Rollover IRA account allows people to transfer their funds from their old employer-sponsored retirement plan into an IRA. An IRA rollover maintains the tax-deferred status of the retirement assets. The account holder needn’t pay the current taxes or the penalty for withdrawing early from the retirement account to transfer into an IRA.Who it’s best for: Employees, who have 401(k) retirement plans from their past employers.Tax treatment: After the rollover, all future contributions are tax-deferred.