Planning for a safe and financially secure future is crucial to many of us, which is why 75% of non-retired adults have some savings. One of the methods you can save up for your future is to set up an IRA account. An Individual Retirement Account (IRA) is a savings account for retirement that’s available to individuals with earned income, including those with a 401(k) at work, non-working spouses with earning partners, and even minors earning income. 

 You can open an IRA through a bank broker or invest the deposited funds in assets like stocks, bonds, ETFs, or gold like Oxford Gold Group Gold IRA. Your account’s growth depends on your investments and contributions. Here is a guide to types of IRAs and whether you should set up an IRA account. 

Types of IRAS

IRAs come in different types: Traditional and Roth IRAs are for individuals, and SEP and SIMPLE ones are for self-employed and business owners. While you can have multiple types of IRAs, there’s a single annual contribution limit. Early withdrawals before age 59 ½ may result in a 10% penalty and taxes unless you meet specific exceptions.

#1 – Traditional IRA

By contributing to a traditional IRA, you qualify for a tax deduction in the year you contribute, with a maximum contribution limit of $6,500 and $7,500 if you’re over 50. When you withdraw the funds, you’ll owe taxes on the entire withdrawn amount. Once you reach the age of 73, you’re required to start making withdrawals from the account.

#2 – ROTH IRA

A Roth IRA doesn’t provide an upfront tax deduction, unlike a traditional IRA. With a Roth IRA, you pay taxes on your current income, invest it in the account, and then get tax-free withdrawals in retirement. Notably, there’s no mandatory withdrawal requirement from a Roth IRA.

#3 – SEP IRA

A SEP IRA is an account designed for self-employed individuals and business owners. It provides the tax benefits of an IRA, and the employer can contribute an amount equal to the lesser of 25% of their income or $66,000, which is considerably higher than what individuals can typically save in a regular IRA.

#4 – SIMPLE IRA

A SIMPLE IRA is a retirement plan for self-employed individuals and business owners. Employees can set aside a portion of their salary in the account, and employers must contribute. For employees, the maximum contribution allowed is $15,500 in 2023. 

Should You Set Up an IRA?

One significant advantage of an IRA is its tax treatment, which varies depending on the type you select. With a traditional IRA, you receive a tax deduction for your contributions in the year you make them, and you pay taxes when you withdraw funds during retirement. In contrast, a Roth IRA doesn’t provide an immediate tax benefit, but it allows tax-free distributions in retirement. When assessing traditional and Roth IRAs, people often consider their current tax situation versus the expected lower tax bracket in retirement as a basis for comparison.

The primary benefit of an IRA is the broader range of investment options and choices it offers. Unlike employer-sponsored 401(k)s, which may have limited investment options, IRAs grant you more control over your investments, which leads to increased retirement income and potential tax savings.

One drawback of IRAs is that they come with lower annual contribution limits. For instance, in 2023, you can contribute up to $73,500 to a 401(k) and potentially benefit from employer matching, while IRA contribution limits are significantly lower.

Endnote 

Planning for financial security and retirement is a priority for many, and Individual Retirement Accounts (IRAs) are an option to achieve this goal. They are accessible to those with earned income, including those with a 401(k), non-working spouses, and even minors with income. 

There are different types of IRAs, with traditional and Roth IRAs for individuals and simple and SEP IRAs if you’re a business owner or self-employed. The difference between a traditional and a Roth IRA is that you pay taxes when withdrawing your amount in a traditional IRA, while you pay taxes when you deposit the amount for an IRA in Roth. In SEP and SIMPLE IRAs, you can contribute more than a traditional IRA. You should set up an IRA if you want tax benefits and many investment options. However, if you’re contributing more to your retirement, you should set up a 401(k) rather than an IRA.