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IRA is an investment account with tax advantages for retirement. Anybody earning a wage, salary, or income can open an IRA account and enjoy the tax incentives. Additionally, unemployed spouses of salaried employees are eligible for an IRA.

You can open an account through a personal broker, investment company, bank, or online broker. IRAs can be investments such as stocks, mutual funds, bank deposit accounts, or bonds. In 2022, the annual IRA contribution limit is $6,000 and $7,000 for individuals 50 years and above.  

There are seven basic types of IRA. Read onto get the one that will give you the most financial advantages.

1.      Roth IRA

This individual account offers tax-saving growth and withdrawals for you to pay taxes before saving.

Key Features

·        Contributions are not deductible.

·        Earnings and withdrawals in retirement are tax-free.

·        The maximum contribution is $6,000 and $7,000 if you are 50+.

·        Penalties and taxes only apply if you make withdrawals before retirement.

Suitable for: Individuals in a lower tax bracket who think they will be in a higher one in retirement.

2.      Traditional IRA

Traditional IRA is an individual retirement account that offers tax savings. It is the most popular retirement savings account.

Key Features

·       Contributions may be partially or fully deductible depending on your income and filing status.  

·       A tax break for a maximum of $6,000 or $7,000 if you are 50+.

·       Earnings are not taxed as long as they are in the account.

·       Withdrawals are taxable at the tax rate during a transaction.

Suitable for: Individuals in high tax bracket than they'll be in the future and those without a work-based plan.

3.      Non-deductible IRA

It is a retirement plan made with contributions from after-tax income. In this plan, your contributions grow tax-free.

Key Features

·        Contributions are made from taxed income and are non-deductible.

·        Taxes in retirement are on interests but not the principal amount.

Suitable for: Individuals who are not eligible for Roth and deductible IRA.

4.      SEP IRA

SEP stands for Simplified Employee Pension. This retirement plan is similar to a traditional IRA. However, in SEP IRA, contributions are made by the employer for the employee. Within SEP IRA, earnings are not taxable, but distributions during retirement are taxable.

Key Features

·        The employer should contribute an equal percentage to all employees.

·        Contributions may vary every year, but employers to maintain an equal percentage for every employee.

·        The employee must have worked with the employer for at least three in the last five years.

·        The employee must have earned a minimum of $600 during the year of eligibility.

·        Sole proprietors are eligible for SEP IRA contributions.

·        Employees cannot contribute via salary deferral.

·        In 2022, the annual contributions are the lesser of; $61,000 or a limit of 25% of employee compensation.

Suitable for: Small entrepreneurs who want; to avoid expenses of a retirement plan or a tax deduction on the contributions they make for employees.

5.       SIMPLE IRA

The Savings Incentive Match Plan for Employees is for self-employed and small companies. It is similar to 401k plan. SomeSIMPLE IRA plans allow you to choose a financial institution to hold ana ccount.

Key Features

·        Contribution limits for 2021 and 2022 are $13,500 and $14,000 respectively.

·        Employers must make a 2% fixed contribution or a 3% matching contribution for each employee.

·        Catch-up contributions are allowed if you are 50 and older (an additional $3,000).

·        Early withdrawals within the first two years attract a 25% penalty.

·        To qualify for a SIMPLE IRA plan, an employee should have earned a minimum of $5,000 in any two years before the current one and should expect to make at least the same amount in the current year.

Suitable for: Companies with less than 100 employees or self-employed individuals.

6.      Spousal IRA

To be eligible for IRA, the Internal Revenue Service rules that one must be an income earner. However, there is an exception for married taxpayers; If one of the partners is not working, both of you can contribute to your separate IRA (Traditional or Roth).

Key Features

·        Contributions are the same as in Roth or traditional IRA.

·        The account must be in then on-working spouse's name, but either spouse can fund the account.

·        The couple must have taxable compensation and file joint returns.

Suitable for: Non-working or low working spouses of working individuals

7.      Self-directed IRA

Self-directed IRAs are governed by the rules in Roth and traditional IRAs but without limitations on investments. In this plan, an individual can own hard assets, real estate, or private companies.

Key Features

·        You cannot set this retirement account without a custodian or trustee specializing in the investments you want to hold in the account.

·        The plan has many prohibited transactions that may attract penalties and taxes.

·        You cannot hold things like life insurance or collectibles in this account.

Suitable for: Investors who want to invest in other investments such as real estate.

Best Fit Retirement Plan

Investing in IRAs ensures that you have a retirement nest set aside, especially if your employer does not have a 401(k) plan for the employees. After reviewing the above features for each plan and the contributions to make, you know which plan is the best fit.