An IRA is an investing tool that used by individuals to earn and allocate funds for their retirement savings. There are many kinds of retirement accounts IRA available now. It includes Traditional IRAs, SIMPLE IRAs, Roth IRAs, and SEP IRAs. Sometimes, it also referred to as individual retirement arrangements (IRA). IRAs also consist of many financial products such as bonds, stocks, or mutual funds.
Types of Individual Retirement Accounts (IRAs):
Individual taxpayers establish Traditional and Roth IRAs while SIMPLE and SEP IRAs are established by self-employed individuals and small business owners who require retirement plans.
In many cases, when you contribute to traditional retirement accounts IRA, they are treated as tax deductible. For instance, when you contribute $5000 to your IRA, you can claim the amount that has been deducted on your income tax returns. The internal revenue service does not apply income tax to those kinds of earnings.
During retirement, when you withdraw an amount from your account, your withdrawals can be taxed as income. However, not all traditional IRA accounts qualify for a deductible account, only if you have a retirement plan through work or earn less than $61000.
When you contribute to Roth retirement accounts IRA, the withdrawals are not tax-deductible, but the eligible distributions are all tax-free. That means you need to contribute to a Roth account along with after-tax dollars.
However, when IRAs grow, you need not face any taxes on capital gains. Even when you retire, you are able to withdraw money from your account without incurring taxes towards your withdrawals.
Simplified Employee Pension (SEP) IRAs:
Self-employed individuals like freelancers, independent contractors and small business owners can set up SEP IRAs. When a small business owner sets up an SEP retirement accounts IRA for the employees, he/she can deduct the contributions from the business income.
However, his employees are not allowed to contribute to the owner’s accounts. During retirement, when they make withdrawals from their account, the withdrawals are taxed as income.
Savings Inventive Match Plans for Employees (SIMPLE) IRAs are also for self-employed individuals and small business owners. However, unlike SEP-IRAs, this allows employees to make their contributions to their accounts.