Types of IRA: Know 4 Different Types of IRAs

IRAs or Individual Retirement Accounts are an investment tool where an individual can accumulate his savings for retirement planning . These savings are tax-free, and contributions to the IRA up to a certain limit are tax-deductible. However, there might be specific schemes where investment is taxable. Let’s have a look at the four different types of IRAs:

Traditional IRAs are retirement accounts where the contributions made are tax-deductible (in most cases) an investor’s earnings grow tax-deferred. This means the gains are taxed at applicable rates when withdrawals are made at the time of retirement. There is no maximum income limit, and anyone can invest in this IRA irrespective of how much they earn.

In Roth IRAs, the contributions made by the investor are not tax-deductible, but qualified distributions are tax-free. Investments in the Roth IRA are made by using after-tax dollars, but no taxes are levied on investment gains. At the time of retirement, the money can be withdrawn without paying any taxes.If the account holder does not require funds, then he/she is not bound to withdraw funds and contributions to the account can be irrespective of the age of the account holder. For withdrawing funds tax-free, the account must have been held for at least five years, and the account holder must be 59½ or older.

Simplified Employee Pension IRAs are just like traditional IRAs. Self-employed individuals, like independent contractors, small business owners, freelancers etc. can set up SEP IRAs. In these types of IRAs, the taxation rules are the same as in the case of traditional IRAs, which means the gains are taxed at the time of withdrawal.Generally, only employers are allowed to contribute to these accounts, but employees could make traditional IRA contributions to SEP IRAs.

These IRAs are also designed for small businesses and self-employed individuals. SIMPLE stands for “saving incentive match plan for employees”. The taxation rules for withdrawal are the same as in the case of traditional IRAs.Unlike in the case of SEP IRAs, employees can make contributions to their SIMPLE IRAs, and the employer is required to make contributions as well. The contributions made are tax-deductible, and this pushes the contributor to a lower tax bracket.An individual can choose any from the four types of IRA depending on his employment status and retirement requirements.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.