Which IRA is Right for Me?

When it comes to saving for retirement, choosing the type of Individual Retirement Accounts (IRAs) can be perplexing. Each type has its own set of rules regarding tax advantages, income limits, and withdrawal regulations. Part of our job as financial advisors is to help empower you with the financial literacy necessary to choose the option for your overall financial goals. In this guide, we will define IRA options and address for whom each option should be considered.

Traditional IRA: Pre-Tax Savings Grow Tax-Deferred

A Traditional IRA allows you to make contributions with pre-tax dollars, meaning the contributions can be deducted from your taxable income, potentially reducing your tax bill for the year you contribute. The funds in a Traditional IRA grow tax-deferred, which means you won't pay taxes on the gains until you withdraw the money.

Who should consider:

• Individuals who expect to be in a lower tax bracket during retirement than they are now.
• Those who do not have access to a workplace retirement plan.

Roth IRA: Pay Taxes Now, Not Later

Unlike a Traditional IRA, contributions to a Roth IRA are made with after-tax dollars. This means there’s no tax deduction when you contribute, but the major advantage is that both your contributions and earnings can be withdrawn tax-free in retirement, as long as certain conditions are met.¹

Who should consider:

• Individuals who expect to be in a higher tax bracket during retirement.
• Younger investors who benefit from the tax-free growth over a longer period.
• Those who want flexibility to withdraw their contributions (but not earnings) without penalties.

SEP IRA: For the Self-Employed and Small Business Owners

A Simplified Employee Pension (SEP) IRA is designed for self-employed individuals or small business owners. SEP IRAs allow for higher contribution limits compared to Traditional and Roth IRAs. Contributions are made by the employer and are tax-deductible as a business expense.

Who should consider:

• Self-employed individuals or small businessowners.
• Those who want to save more than the traditional IRA or Roth IRA limits.

SIMPLE IRA: A Starter Retirement Plan for Small Businesses

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another plan geared towards small businesses and self-employed individuals. It allows both employer and employee contributions, similar to a 401(k), but with simpler and less costly administration requirements.

Who should consider:

• Small business owners who want to offer a retirement plan to employees without the complexity and cost of a 401(k).
• Employees in small businesses who want to make their own contributions to their retirement savings.

Factors to Consider

When choosing the right IRA, consider the following:

• Current and Future Tax Rates: If you expect your tax rate to decrease by retirement, a Traditional IRA might be more beneficial. If you expect it to increase, consider a Roth IRA.
• Income Limits: Roth IRAs have income limits for eligibility; make sure you qualify.
• Access to Funds: Roth IRAs offer more flexibility for early withdrawals.
• Contribution Limits: SEP and SIMPLE IRAs allow for higher contributions but have specific eligibility requirements.

Understanding the differences among IRAs can instill more confidence in our clients when they are advised to utilize one type over another. If you have questions about retirement savings plans, we are here not only to advise you but to help empower you with the knowledge of how they can align with your big financial picture.