Alternative Investor
Nest with money and egg with IRA on it

IRA Options

IRA Options: Understanding How To Plan For Retirement

There are many options for helping with retirement planning and savings and few are as well known yet under-utilized as an IRA account. Most people believe there are only two main types of IRA accounts: Roth and regular, however, this isn’t correct. The SEP-IRA for business owners or self-employed individuals throws a very interesting loop into this argument for some individuals. There are certain pros and cons to each one, and understanding these better will help you decide which option is best for you.

Traditional IRA

In the traditional IRA, all funds are tax-free when put into the account, but then all withdrawals at retirement are taxable income. This still gives a few advantages – one being that it’s easier for low incomes to fund a traditional IRA since the taxes are deferred and for young savers, this is still worth a look because the power of getting more savings in quickly for a long period of time means compounding could end up making more than the tax penalty 40 or 50 years down the road.

Pros:

  • – Easier to fund at a reasonable rate
  • – Takes advantage of compounding over time
  • – Currently up to a $5,000 annual contribution limit in most cases
  • – Tax deduction since funds are pre-tax

Cons:

  • – Major tax penalties for closing or making withdrawals early
  • – All income withdrawn from the account is taxable
  • – Required minimum withdrawals start at age 70

 

Roth IRA

Contributions to a Roth IRA are made post-tax, meaning all taxes are paid upfront. This can make it harder or more expensive to save upfront, but it also means that the contributions grow tax-free since all taxes were already paid upfront on the principle. This means it can take longer, and be more expensive to fund, but is a great option to get taxes out of the way and help with retirement planning since you won’t have to worry about taxes.

Pros:

  • – All income withdrawn is tax-free
  • – Income can be withdrawn early with minimal penalties because it has already been taxed
  • – Currently up to a $5,000 annual contribution limit with some laws allowing late savers to donate more to “catch up” on retirement savings
  • – There are no minimum withdrawals required beginning at age 70

Cons:

  • – No tax deduction since funds are post-tax
  • – Can take longer to build a really solid nest egg because taxes must be paid upfront

 

SEP IRA

The SEP-IRA only applies to individuals who are self-employed or run their own business as an LLC, S Corp, or similar business organization. Assuming the self-employed individual is doing well and generating income, this can be a great option because of high contribution limits that allow a lot of money to be put into a developing nest egg very quickly.

Pros:

  • – High contribution limits of 25% of gross income or $53,000, whichever is less
  • – Pre-tax contributions make it easy to build a nest egg quickly
  • – Contributions are tax-deductible

Cons:

  • – Contributions are pre-tax meaning withdrawals are taxable
  • – Required minimum distributions at age 70

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK.

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva Switzerland, after the 2008 financial crash.

Today he is head of operations and marketing for Ascenture Capital Group.

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