As you begin retirement planning, a term you may hear more and more is Individual Retirement Account or IRA. As you learn about the types of IRA savings accounts that are out there and their competing rates and terms, it can be easy to feel overwhelmed. This overview outlines the key features to help you choose the one that is right for you.
What is an IRA?
An IRA is an investment account specifically designed to save for retirement. By opening an IRA you can invest in stocks, bonds and other assets. The amount you invest, known as your contribution, can help to reduce from your income tax in the current tax year, but you will pay taxes on it when you withdraw the money during retirement.
There are four common types of IRA savings accounts:
- Traditional IRA. With a traditional IRA, the amount you invest is deducted from your paycheck before taxes are taken out, so your current year taxable income is less. Your money grows in the IRA un-taxed until you withdraw the funds from your account at the specified time. Anyone can open a traditional IRA, but the amount you can defer on your taxes can vary based on your age and other deductions.
- ROTH IRA. Roth IRAs differ from traditional IRAs in that the tax benefits are reversed. Contributions are taxed before you invest instead of when you withdraw the money in retirement. The tax penalty should be less when you withdraw funds later in life. This applies to both the amount of our contribution and the interest earned. Also, with a ROTH IRA, you can take money out at any time without penalty. But, like a traditional IRA, there are federal contribution limits as to how much you can sock away.
- SEP IRA. A simplified employee pension is a retirement tool for small business owners or people who are self-employed. These are like a traditional IRA in that contributions are not taxed. The savings grow tax-deferred, and money is not taxed until you withdraw it at retirement. Advantages of a SEP IRA are that they are relatively easy to set up and administer, while they allow for a much larger contribution.
- SIMPLE IRA. Finally, a Simple IRA is a retirement savings account designed for small companies with 100 or fewer employees. It stands for Savings Incentive Match Plan for Employees. It is known as the small company version of a 401(k), but it works much like a traditional IRA.
How to choose
An IRA is not an investment. Rather it is an account from which investments are made. Thus, choosing the best IRA savings option depends on how you want to manage those investments. If you want a direct hand in choosing which investments you want to fund, using a Guaranty Bank IRA is a good place to start. Guaranty Bank provides self-directed investment accounts. Another advantage of choosing a Guaranty Bank IRA is that you can fund the IRA through your checking account with regular automatic transfers.
There are also IRA brokers, ranging from traditional or “retail” brokerage firms to discount brokers. Traditional firms can walk you through a process of setting up an IRA online with investment advisors on hand to answer any questions, or they can provide a more personal service where they help you choose investments for your situation. And there are brokerage firms that handle the entire process for you as a part of managing your entire investment portfolio.
Discount brokers can also help you through the process, but they call for the client to do much of the upfront research and analysis. Discount brokers also may hold seminars and webinars to share investment tips and strategies.
Another service that is becoming increasingly popular are robo-advisors. These are low-cost digital platforms that provide automated investment services that are driven my algorithms that help you make risk-appropriate investments based on the size of your IRA.
After you decide on an IRA provider, the setup process is pretty straightforward. Most providers will ask for your name, social security number, birth date, contact information, and employment details. From there, you make your initial contribution to open the IRA account.
An IRA savings account is an effective and tax-advantaged tool that can be an essential part of your retirement plan. For more information about opening an account, contact your local banker and ask about IRA options that are right for you. Whether with a traditional or Roth IRA, or a plan offered through your employer, you can save on taxes and find a powerful way to save for retirement.