Every individual strives to save for their retirement and there are numerous retirement accounts to choose from. To begin with, you need to contribute to 401(k) if you are eligible for one. This will ensure that you get money from your employer. If you have crossed the limit on your 401(k) or have no retirement plan, then you need to consider a retirement account. There are four types of IRA accounts for you to choose from. A clear understanding of the accounts and their features will help you decide on the right one. These accounts are specially designed for self-employed individuals.
The account may be set up with a bank or a financial institution. It is like a savings account that is set aside for retirement. The contribution you make each year is limited according to the type of account you have.
Types of IRA accounts
The four different kinds of IRA accounts for you to choose from are discussed in brief below:
- Traditional IRA
This is the basic IRA account which has a benefit of lowering your tax burden. Your contributions are deductible and will help bring down the burden of taxation. However, the deductibility is based on the income and whether you have an employer retirement plan or not. It also requires minimum yearly withdrawals beginning from the age of 70 and a half.
- Roth IRA
One of the best retirement accounts is Roth IRA where the distribution at the time of retirement is not taxed. There are simple and straightforward rules for withdrawals before the end of the stipulated period. It is important to note that your eligibility to contribute will depend on the income you earn and you will only be able to get the benefit of tax saving if the tax rate is higher at the time of your retirement.
- Spousal IRA
This allows the spouse to accrue the tax advantages on the retirement savings. However, the non-working spouse will be subjected to the same contribution as you are. In order to be eligible for this account, it is important to file a joint tax return.
- Rollover IRA
This is an account which allows you to roll over the money from the past employer’s account so that you may get more control. However, the rollover should not have a different tax treatment. Otherwise, it will attract income tax on the contributions.
Consider the pros and cons of every account so as to choose the best retirement account for yourself.