In spite of the fact that approximately one-half of Americans are woefully unprepared for retirement, there are a great deal of options to help citizens save for their golden years. Although 401(k)s are the most familiar method of retirement funding, individual retirement accounts (IRA) are swiftly rising in popularity.
Essentially, an IRA is a savings account that boasts a long list of tax breaks and deductions. While this account does involve some specific restrictions and eligibility guidelines — such as income and employment status — many Americans would likely be able to open and take advantage of the benefits of an IRA.
Please continue reading in order to learn more about IRAs, as well as how you can get the most out of such an account.
There is more than just one type IRA. In fact, there are IRAs for just about everyone, ranging from your average citizen and employees to small business owners. However, it is important to be familiar with each kind of IRA in order to select the account that would best fit your personal circumstances.
A traditional IRA is one of the easiest to grow, as contributions to this account are tax-deductible. However, it is important to note that the owner of a traditional IRA is prohibited from contributing more than $5,000 per year. Additionally, contributions made by individuals who earn more than $61,000 annually may only be partially deductible, while contributions made by those who earn over $71,000 annually are not eligible for deductions whatsoever.
A Roth IRA, on the other hand, allows owners to contribute after-tax dollars to ensure they are not faced with paying income taxes when the time comes to start withdrawing from the account — a feature traditional IRAs do not boast.
Simplified Employee Pension (SEP) IRAs are designed for those who are self-employed, such as contractors, freelancers, and even small business owners. If a small business owner establishes this account for his or her employees, they can deduct these contributions from their business income. The only stipulation is that employees cannot personally contribute to their accounts.
Savings Inventive Match Plans for Employees — or SIMPLE IRAs — are also small-business-friendly. The only real difference between SIMPLE and SEP IRAS is that employees can personally contribute to their IRAs through SIMPLE plans.
Now that you grasp the fundamental differences between IRA plans, it is imperative that you learn the best tactics for maximizing your savings. That vital information can be found in the next installment of this series, which will be coming soon.