What type of IRA should I open?
The factors to consider include: your age, your contribution and deferral capability, if you are a sole proprietor or own a company, whether you have common law employees, when you wish to retire, and your tax situation. Do you seek to make the highest contribution and have the most flexibility? Level of complexity is also a factor to consider. You can review the information regarding plan and contribution comparisons on our website. You should also seek the services of a tax professional or financial planner to work with you on your specific strategy.
Traditional IRA: A Traditional IRA is an individual retirement account. Any person earning “taxable compensation” through employment income or self-employment income is eligible to open a Traditional IRA. A Traditional IRA is a "pre-tax" account. All contributions are tax-deductible for the year the contribution is made. The funds in a Traditional IRA grow tax-deferred until the account holder makes a distribution. At age 59.5, the account holder may take distributions without penalties. The distributions are taxed at the account holder’s ordinary income rate.
Roth IRA: A Roth IRA is an individual retirement account. A person is required to have earned “taxable compensation” through employment income or self-employment income is eligible to open a Roth IRA, and meet certain requirements concerning their modified adjusted gross income. Those whose income is above a certain amount may be ineligible to contribute. A Roth IRA is a “post-tax” account. Contributions are made from the individual’s “post-tax” funds. Contributions into a Roth IRA are taxed as regular income in the year the contribution is made. Earnings generated by investments are tax-deferred, and qualified distributions are tax-free.
SEP IRA: A Simplified Employee Pension is a retirement plan established by employers, including self-employed individuals. A SEP is an IRA-based plan that allows employers to make tax-deductible contributions on behalf of eligible employees, including the business owner.
SIMPLE IRA: A SIMPLE IRA is a retirement plan that may be established by employers, including self-employed individuals. A SIMPLE IRA allows eligible employees to contribute part of their pretax compensation to the plan.
Individual 401(k): A 401(k) plan set up for an individual running a sole proprietorship or a small business with a spouse. Plan contribution limits for the individual are equal to a typical company-sponsored 401(k), but the sole proprietor can also make an employer contribution to the plan.