The Individual retirement account (IRA) is the most common type of retirement account utilized today. An IRA is a tax-advantaged savings and investment account, designed specifically to help you save money for your retirement years. While many numerous types of IRAs exist, four types of IRA accounts are most popular with consumers today.
These four popular types include traditional, Roth, SEP and SIMPLE IRAs. Each one of the four provides its own tax and other benefits. IRAs are obtainable through banks, credit unions and in-person or online-only brokers and financial advisors. IRAs are often tax-deductible, with certain withdrawals made free of taxation.
The amount of money you are permitted to deduct from your taxes based on the contributions you make to your traditional IRA account depends on your marital and tax status. This type of retirement savings plan does allow for dollar-for-dollar deductions up to a certain income level. For example, if you contribute $5,000 to your traditional IRA you might be able to reduce your taxable income by an equal $5,000. Withdrawals from your traditional IRA are considered taxable income the same as your ordinary income, however.
Traditional IRA contribution limits for 2023 are $6,500 per year for people under 50 years old and $7,500 per year for those 50 years and older. People who are married to a spouse who has an employer-sponsored retirement plan are limited in their traditional IRA tax-deductible contributions, even to the point of elimination once they reach a specific income level.
Contributions are still permissible, albeit not at a tax-deductible status. If neither you nor your spouse has an employer-sponsored retirement plan, your traditional IRA contributions are tax-deductible regardless of your income.
Roth IRA contributions are not tax-deductible. Withdrawals from Roth IRA accounts are tax-free, however, and no taxes are assessed for applicable investment gains. Roth IRA contribution limits for 2023 are also $6,500 per year for people under 50 years old and $7,500 per year for people 50 years and older.
Maximum permissible contribution amounts decrease after you reach an income level of $138,000 to $153,000 (depending if you lived with a spouse at any point in the year) per year as a single person or $218,000 per year as a married filing jointly taxpayer.
SEP IRAs are most opened by self-employed workers and small-business owners who have little or no employees. SEP IRA contributions are tax-deductible. Sitting investments increase with tax-deferred status until you retire, at which point applicable distributions become taxable income.
Maximum contributions for 2023 are 25 percent of your compensation or $66,000 (whichever amount is less) and no catch-up contributions are required for people ages 50 and older. When business owners self-contribute to SEP IRAs, proportional contributions for every eligible employee are also required.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are designed for small businesses having fewer than one hundred employees. SIMPLE IRA contributions are tax-deductible. Like SEP IRAs, sitting investments increase with tax-deferred status until you retire at which point applicable distributions convert to taxable income.
Maximum 2023 SIMPLE IRA employee contributions are $15,500 per year for those under 50 years of age. People 50 years and older are permitted to make an additional $3,500 catch-up contribution. Employer contributions are required.