Finding the Right IRA to Fit Your Needs

If the variety of Individual Retirement Accounts (IRAs) causes you to wonder which type of IRA, or which combination of IRAs, would best meet your needs and goals, you’re certainly not alone You have several options, including the Roth IRA. Let’s take a moment to explore the IRA options.

Traditional IRAs. Contributions to these IRAs may be tax deductible and are limited to $5,500 in 2017 ($6,500 for those age 50 and older). However, the deductibility of contributions is generally dependent upon one, if not all, of the following factors: whether or not you (the IRA owner) are participating in an employer-sponsored retirement program, your tax-filing status, and your adjusted gross income (AGI)—taxable gross income less any possible deductions. If you withdraw money before age 59½, you will pay a 10% Federal income tax penalty (plus any income tax due), unless an exception applies. Qualifying exceptions include first-time home purchases, disability expenditures, and qualified higher education expenses, among others. At age 70½, contributions cease, and required minimum distributions must begin by April 1st of the year following attainment of age 70½.

Roth IRAs. Similar to the traditional IRA, contributions to a Roth IRA are limited to $5,500 per year in 2017 ($6,500 for those age 50 and older). (Note: The limit applies to the total of all IRAs that a person may hold in a given tax year.) However, contributions to a Roth IRA are not tax deductible. Contributions phase out for single filers with AGIs between $118,000 and $133,000 and for joint filers with AGIs between $186,000 and $196,000 in 2017. Contributions may be made for life (i.e., need not stop at age 70½), and no withdrawals are required until one year following the death of the participant. In addition, qualified distributions, including earnings, are tax free if you’ve held your account for at least five years and are older than age 59½. Withdrawals made prior to age 59½ may be subject to a 10% Federal income tax penalty, unless certain qualified exceptions apply.

SIMPLE IRAs. Many small businesses have found the popular 401(k) plan costly to administer. A more affordable alternative may be the Savings Incentive Match Plan for Employees (SIMPLE). Under a SIMPLE, an eligible employee can defer up to the lesser of 100% compensation or $12,500 in 2017. This amount increases to $15,500 for those age 50 and older. A SIMPLE IRA must provide immediate vesting, and an employer can either match employee annual contributions on a percentage basis, up to 3% of compensation, or provide a nonelective contribution for all employees of 2% of compensation. There are no annual tax filing requirements and no need for anti-discrimination tests. In addition, both owners and employees can save more than they could with the Traditional or Roth IRA.

SEP IRA. The Simplified Employee Pension (SEP) is also simple to administer. Only employers contribute to a SEP. Congress created the SEP primarily for small businesses to provide a retirement plan without burdensome administrative costs or government paperwork. Contributions to a SEP are limited to 25% of compensation (earned income for self-employed) of up to $270,000 or a maximum of $54,000 in 2017. As a result, a SEP IRA may allow higher levels of contributions than any other IRA plan. It is important to note that the limit for owners’ contributions for sole proprietorships and partnerships is calculated differently. For more information, contact your tax and legal professionals.

In a world clamoring for tax simplification, you may find that retirement planning is complex. Therefore, an IRA can be attractive for its versatility and ease of implementation. Congress has provided many options for individuals and small businesses to establish retirement plans, so you may discover it’s easier than ever to find the “right” IRA to fulfill your objectives.

 

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