To help you save for retirement there are several types of retirement accounts. These accounts include Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, 401ks and 403b plans. In this article, we will go over the basics of these 6 types of retirement accounts.
Traditional IRA
IRA stands for Individual Retirement Account. When you make contributions to these accounts, they are tax deductible. Your money will grow tax deferred. This means you do not pay taxes on the funds until withdrawn. When you make withdrawals, you pay ordinary income tax on them. There are limitations to contributions. In 2024 the maximum is $7,000 for those under 50 and $8,000 for those 50 and above.
Roth IRA
With Roth IRAs, you fund them with money you already paid taxes on. This means contributions are not tax deductible. However, all distributions are tax free and there are no required minimum distributions. The same contribution limits that apply to Traditional IRAs apply to Roth IRAs.
SEP IRA
SEP IRA stands for Simplified Employee Pension Individual Retirement Account. These IRAs are made for those who are self-employed. This could include contractors, freelancers, and small business owners. Pretax funds create this account, so you will pay ordinary income tax on withdrawals. Contributions come with limitations. You are limited to 25% of your compensation or $69,000, whichever is less. If you have employees, you can deduct contributions you make to their accounts. However, employees cannot contribute to their own account.
SIMPLE IRA
SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. Like SEP IRAs, these accounts are specialized for the self-employed. Contributed funds are pretax so the withdrawals are taxed as ordinary income. Employees and employers can make contributions, and all contributions are tax deductible. The contribution limit for SIMPLE IRAs is $16,000.
401k
All contributions made to your 401k are pretax. You invest fund in subaccounts that you are responsible for picking. 2024 contributions are limited to $23,000 for those under 50 and $30,500 for those over 50. Employers have the ability to match employee contributions. If there is employer matching, contribution limits are different. In 2024 those limits are $69,000 for those under 50 and $76,500 for those over 50. When you make distributions, you will pay ordinary income tax on them.
403b
A 403b is a tax-sheltered annuity plan. You find these types of retirement accounts at public schools and nonprofit organizations. Contributions are mad through payroll deductions. These contributions will reduce the employee’s gross income for the year. To make withdrawals from this account without facing a penalty you must be at least 59 ½.
Saving for Retirement
You can successfully save for retirement using one or multiple of these 6 types of retirement accounts. They all have benefits and drawbacks that can help you prepare for retirement. You also can meet with a Certified Financial Planner to help you find the best strategy for you.
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