Introduction

Individual Retirement Accounts (IRAs) are a cornerstone of retirement planning, offering various tax advantages to help you save for the future. With several types of IRAs available, it’s essential to understand the differences and choose the one that best aligns with your financial goals. Here’s a comprehensive guide to the different types of IRAs.

1. Traditional IRA

Overview

A Traditional IRA allows you to contribute pre-tax dollars, which can reduce your taxable income for the year. The investments in the account grow tax-deferred until you withdraw them in retirement.

Key Features

• Tax Benefits: Contributions may be tax-deductible.
• Withdrawal Taxes: Withdrawals are taxed as ordinary income.
• Required Minimum Distributions (RMDs): Begin at age 72.
• Contribution Limits: $7,000 annually (under 50); $8,000 (50 and older).

2. Roth IRA

Overview

A Roth IRA is funded with after-tax dollars, meaning you do not get a tax deduction for contributions. However, qualified withdrawals in retirement are tax-free.

Roth IRA distributions are tax free if made 5 years after the initial contribution to the plan and you are over 59 ½.

Key Features

• Tax Benefits: Tax-free withdrawals in retirement.
• No RMDs: Unlike Traditional IRAs, Roth IRAs do not have RMDs during the account holder’s lifetime.
• Contribution Limits: Same as Traditional IRAs.
• Income Limits: Contributions are subject to income limits.

3. SEP IRA

Overview

A Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners. It allows for higher contribution limits compared to Traditional and Roth IRAs.

Key Features

• Tax Benefits: Contributions are tax-deductible.
• Contribution Limits: The lesser of 25% of compensation or $58,000 (for 2021).
• Flexibility: Employers can decide how much to contribute each year.

4. SIMPLE IRA

Overview

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is intended for small businesses with 100 or fewer employees. It offers a straightforward way for employers and employees to contribute to retirement savings.

Key Features

• Tax Benefits: Contributions are tax-deductible.
• Contribution Limits: $13,500 annually (under 50); $16,500 (50 and older).
• Employer Contributions: Employers must either match employee contributions up to 3% of compensation or make a fixed contribution of 2% of compensation.

5. Self-Directed IRA

Overview

A Self-Directed IRA provides the same tax advantages as a Traditional or Roth IRA but allows for a broader range of investment options, including real estate, private equity, and more.

Key Features

• Investment Flexibility: Invest in a variety of assets beyond stocks and bonds.
• Tax Benefits: Same as Traditional or Roth IRAs, depending on the type.
• Complexity: Requires careful management and due diligence.

Conclusion

Choosing the right type of IRA depends on your financial situation, retirement goals, and tax considerations. Whether you prefer the immediate tax benefits of a Traditional IRA, the future tax-free withdrawals of a Roth IRA, or the higher contribution limits of SEP and SIMPLE IRAs, understanding each option can help you make an informed decision.

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So Why Choose Parkstone Financial?

At Parkstone Financial, we offer expert guidance to help you navigate the complexities of IRA options and select the best one for your needs. Based in Valdosta, GA, our experienced advisors provide personalized advice and comprehensive retirement planning services. We ensure that your IRA strategy aligns with your long-term financial goals and maximizes your retirement savings. Trust Parkstone Financial to be your partner in building a secure and prosperous future. Contact us today to learn more about our services and how we can help you achieve your retirement dreams.

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DISCLOSURES

This content was developed by Parkstone Financial from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc.