There are several different types of Individual Retirement Accounts (IRAs), including:

• Traditional
• Roth
• SEP (Simplified Employee Pension)
• SIMPLE (Savings Incentive Match Plan for Employees)

Different types of IRAs may have varying contribution limits, tax ramifications, and withdrawal requirements and rules. Your Allen & Company Financial Advisor can help you determine which IRA is appropriate for you.

Traditional IRAs

Contributions to your traditional IRA are made on a pre-tax basis and allow for the tax-deferred accumulation of assets. Anyone with earned income is eligible to open a traditional IRA, but there are some restrictions on the amount that can be tax-deducted based on your income, other retirement coverage, and other factors. If your employer does not offer a retirement plan, then a traditional IRA could be an excellent option for saving pre-tax money for retirement.

Traditional IRAs are subject to specific rules, including:

• Limits on annual contribution amounts.
• No contributions are allowed after age 70 ½.
• Required minimum distributions (RMDs), beginning at age 70 ½.
• Penalties for early distributions, which are those taken before the age of 59 ½, although some exceptions for penalties on premature distributions can apply (link to 2.2.5 Pre-59 ½ page).

Roth IRAs

A Roth IRA allows you to make non-deductible annual contributions utilizing a variety of investment options. Distributions from Roth IRAs can provide tax-free income for you and your loved ones and potentially allow you to distribute assets free from federal income taxes to your heirs.

A Roth IRA is subject to the same rules and requirements of a traditional IRA, with a few notable exceptions:

• Contributions are not tax-deductible.
• Qualified distributions are tax-free as long as your contributions remain in your account for at least five years or you are at least 59 ½ years of age at the time of distribution.
• You can continue to contribute to a Roth IRA after the age of 70 ½ and you can leave a balance in the account as long as you live.
• Accounts must be designated as Roth IRAs when they are set up.

A Roth IRA may be a good option for you if you are in a lower tax bracket now but anticipate being in a higher tax bracket upon retirement.

Simplified Employee Pension (SEP) IRAs

SEP IRAs were designed to provide small businesses, including the self-employed, the ability to offer a retirement savings plan to qualified employees. Contributions made to employees’ SEP IRAs and contributions made to a self-employed individual’s SEP IRA are tax-deferred and share the same limits. However, the maximum amount that is tax-deductible may be different. Early withdrawals from a SEP IRA face the same penalties as a traditional IRA.

Benefits of a SEP IRA include:

• The employer’s ability to institute its own eligibility requirements within the established guidelines.
• Flexible and discretionary employee contributions.
• Tax-deductible employer contributions.
• Minimal amount of required paperwork and Department of Labor filings to establish and administer the plan.
• Low fees and expenses related to creating and maintaining the plan.

SIMPLE IRAs

The SIMPLE IRA is ideal for small business owners who wish to provide retirement benefits for employees.  The SIMPLE plan is easy to implement and can be less costly to set up and maintain than a typical qualified retirement plan, such as a 401(k). It consists of a tax-deferred program for eligible employees and a contribution made by employers.

SIMPLE IRAs have specific eligibility requirements. Employers must have no more than 100 employees who earned at least $5,000 in compensation during the previous year. Also, the SIMPLE IRA must be the only plan maintained by the employer. For employees to be eligible, they must have earned at least $5,000 in compensation from the employer during any two prior years and have a reasonable expectation of earning at least $5,000 in the current year.

Types of businesses that might be eligible for a SIMPLE IRA include:

• Sole proprietorships,
• Partnerships,
• Corporations,
• Tax-exempt employers, and
• Governmental entities.

Which IRA is right for you?

If you need an individual retirement savings plan, your Allen & Company Financial Advisor can explain each of the different types of IRAs, the regulations and requirements that govern contributions and distribution, and help you determine whether an IRA will meet your needs.

If you are a small business owner, your Financial Advisor can also help ascertain which retirement plan options will best meet your company’s needs and assist you with creating a solid plan that will give both you and your employees a sense of security.