Did you know that there are 11 types of Individual Retirement Accounts (IRAs)? That’s right, there are 11 ways to set aside money for retirement as an individual. Most are versions of two types of IRAs–traditional and Roth, but it’s important to understand all of your investment options. Let’s start with those two and move on from there.
- A Traditional IRA is an account in which an individual sets aside money for retirement prior to paying taxes. This has the dual benefit of lowering one’s taxable income while saving money for retirement. It was introduced with the Employee Retirement Income Security Act of 1974 (ERISA) and made popular with the Economic Recovery Tax Act of 1981. The money will be taxed when it is withdrawn. You can invest this money in stocks, bonds, or savings accounts through a qualifying financial institution.
- With a Roth IRA, contributions are made with after-tax assets and all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Many savers have found that by the time they started withdrawing funds from a traditional IRA, income taxes were higher than they would have been if they paid the taxes prior to setting aside retirement funds. Named for Senator William V. Roth, Jr., the Roth IRA was introduced as part of the Taxpayer Relief Act of 1997.
- A Simplified Employee Pension (SEP) IRA is a provision that allows an employer to contribute to a traditional IRA account created in the employee’s name, rather than to an account in the company’s name. SEP IRAs are used by small businesses and self-employed individuals to create retirement accounts. There are limits to what an employer may contribute annually and as a percentage employee’s compensation.
- A Rollover IRA is not much different in terms of tax treatment than a traditional IRA. The difference is that the funds are transferred from another retirement account built with pre-tax income, typically another IRA created when someone leaves a company that that offered a SEP IRA or a company sponsored 401k plan.
- A Conduit IRA is similar to a rollover IRA but is the tool used to transfer qualified investments from one retirement account to another. In order to retain the same tax treatment, funds may not be commingled with other types of assets, including other IRAs.
- An Individual Retirement Annuity is either a traditional or Roth IRA set up with a life insurance company through the purchase of a special annuity contract or other insurance product.
- A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a traditional IRA set up by an employer for its employees. SIMPLE IRAs allow employers to match contributions to the plan made by employees. SIMPLE IRAs with matching funds allow employees to reach the maximum contribution to their IRAs with less out-of-pocket money and encourage employee retention for employers.
- A Spousal IRA is a traditional or Roth IRA account created by a married person in the name of his or her spouse. The contributing spouse must have compensation or other earned income that amounts to at least the amount annually contributed to the non-working spouse’s IRA. If the contributing spouse also has an IRA, annual compensation, and earned income must exceed the combined contributions the IRAs. The couple must file a joint tax return in the year of the contribution.
- An Inherited IRA is just what the name implies–a traditional or a Roth IRA that is acquired by a non-spousal beneficiary of a deceased IRA owner. Inherited IRAs are subject to different tax rules that make it different from a rollover IRA.
- An Education IRA (EIRA) allows you to save funds that will be used by a beneficiary to attend college or other form of higher education. Only pre-tax dollars can be contributed to an EIRA, but withdrawals are not subject to income taxes when used for qualifying purposes.
- An Employer and Employee Association Trust Account, sometimes called a group IRA, is a traditional IRA set up by a company or employee organization such as a union or trade organization for employees or member.
There you have it. 11, count ‘em 11 different types of individual retirement accounts. If you are employed and not aware of your company’s offers, ask your manager or HR representative. As always, the best time to start saving for retirement is now.