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| IRA Types |  The main purpose of Individual Retirement Accounts (IRAs) is to encourage people to save for retirement. IRAs offer different tax remissions that depend on the type of IRA used.
There are different types of IRAs. They are:
- Traditional IRA
- Roth IRA
- Simplified Employee Pension (SEP-IRA)
- Savings Incentive Match Plan for Employees (SIMPLE IRA)
Traditional IRA
This type of IRA was the first type of IRA in general. Annual contributions to a Traditional IRA tax deductible that depends on the personal Modified Adjusted Gross Income (MAGI) and whether or not the person and his/her spouse are covered by an employer's retirement plan. Besides, earnings collect on both principal and interest paid and is tax deferred up to the point the individual makes a withdrawal from the IRA.
Roth IRA
This type of IRAs was created by the Taxpayer Relief Act of 1997. Roth IRA offers people an alternative retirement mechanism with different tax benefits from its counterpart. Contributions depends on an individual's Adjusted Gross Income and can be made (even past age 70 ½) to a Roth IRA but are considered non-deductible. Nevertheless, earnings may be withdrawn tax-free and even penalty-free in case of certain conditions. Contributions to a Traditional IRA may be converted to a Roth IRA if the individual's AGI is less than $100,000.
Simplified Employee Pension (SEP-IRA)
This type of IRAs was created to provide employers with a simplified way to make contributions to their employees' retirement income. The rules of SEP allow employers to make an annual contribution of up to 25% of the employee's compensation or $42,000, whichever is less. Moreover, the employee may contribute the smaller of $4,000 or 100% of their compensation to an IRA. If the person will be 50 by 12-31, he/she may also make an additional catch-up contribution of $500. Nevertheless, the amount may or may not be deductible if the participator is covered by an employer retirement plan.
Savings Incentive Match Plan for Employees (SIMPLE IRA)
This type of IRAs uses SIMPLE IRAs for each eligible employee. It was created for businesses that have fewer than 100 employees. It is a simplified and cost effective way for employers and employees to make contributions for providing retirement income. The employee may put off a portion of his/her income to the SIMPLE IRA. The employer has options of a matching contribution. There are certain deadlines and requirements for employers to adopt a SIMPLE IRA plan.
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