IRAs

An IRA is a type of account to which individuals with earned income (and their non-working spouses) can make tax-deductible contributions up to a specified maximum amount. Growth within the account is tax-deferred; however, withdrawals are generally taxed as ordinary income. A 10% tax penalty generally applies to withdrawals prior to age 59 1/2. Withdrawals must begin by the April 1st following attaining age 70 1/2. Eligibility to contribute and deduct contributions from taxable income is subject to rules based on such things as earned income, age and participation in employer-sponsored retirement plans. Often called a “Traditional IRA.” (See also Roth IRA)
IRA

 

Types:

A Traditional IRA offers both tax benefits and investment* flexibility because you can allocate your assets among a variety of investment choices based on your financial objectives, time horizon and risk tolerance.  Your investments will grow tax-deferred, which means you don’t have to pay taxes on your earnings until you make withdrawals.  Withdrawals from a Traditional IRA are subject to ordinary income taxes and, if taken before age 59 1/2, are subject to an additional 10% penalty.  Contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax dollars”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted.

Roth IRAs offer tax-deferred accumulation.  Unlike Traditional IRAs, Roth IRAs offer tax-free distributions at retirement if your account has been open for 5 years or longer and you are over the age of 59 1/2.  Contribution are not tax deductible.  Withdrawals of earnings in a Roth IRA are generally subject to ordinary income taxes, if taken prior to age 59 1/2 and subject to an additional 10% penalty.

A SEP IRA or (Simplified Employee Pension Plan) is a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund account in the company’s name.  Because it is simplified, the administrative costs should be lower than for other more complex plans.  Under SEP, employers make contributions to traditional individual retirement accounts (IRAs) set up for employees (including self-employed individuals), subject to certain limits.

To establish a SEP, you:
  • Can be a business of any size, even self employed.
  • Cannot have any other retirement plan.
  • Must adopt a SEP plan document.

Under a SEP, you, the employer, make contributions to traditional IRAs (SEP-IRAs) set up for each of your eligible employees.  A SEP is funded solely by employer contribtions.  Each employee is always 100% vested in (or has ownership of) all money in his or her SEP-IRA

The advantages of a SEP is that it is easy to set up, administrative costs are usually low and can have flexible annual contribution obligations.

A SIMPLE IRA is a type of tax-advantaged employer-provided retirement plan that allows employees to set aside money and invest it to grow for later use.  Specificially, it is set up to be an employer-provided plan.  Just like more well-known plans such as the 401(k) and 403(b), but offers simpler and less costly administration rules.  Like a 401(k), the SIMPLE IRA is funded by pretax dollars.
Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans.

Contribution limits:
Year Under Age 50 Age 50 and Older
2011 11,500 14,000
2012 11,500 14,000
2013 12,000 14,500

A Self Directed IRA permits the account holder to make investments* on behalf of the retirement plan.