Traditional IRAs, Roth IRAs and cumulative IRAs are the 3 most common types of individual retirement accounts. Variations of the most common types of IRAs include inherited IRAs and custodial IRAs. There are 2 more types of IRA, the SEP IRA and the SIMPLE IRA, which are intended for self-employed people and small businesses. With a traditional IRA, the contributions you make in a given year may be tax-deductible.
Once distributions begin during retirement, they are taxed just like regular income. Anyone who has earned income or a spouse with earned income (if filing a joint return) has the right to contribute. After you turn 72, you should start receiving the required minimum distributions (RMDs). If you expect to be in a lower tax bracket during retirement, a traditional IRA may be right for you.
While contributions to a Roth IRA are not tax-deductible, those withdrawn during retirement may qualify for tax-exempt treatment. And unlike a traditional IRA, there's no RMD while you're alive. There are limits on who can contribute to a Roth IRA based on their modified adjusted gross income (MAGI). If you expect to be in a higher tax bracket during retirement, you may want to consider a Roth IRA.
If you inherit an IRA or employer-sponsored retirement plan after the death of the original owner, this is known as an inherited IRA or a beneficiary IRA. Eligible IRAs include traditional IRAs, Roth, reinvestment IRAs, SEP and SIMPLE. The assets of the original IRA must be transferred to the inherited IRA and be in the name of the new beneficiary. Many RMD rules apply to inherited IRAs.
A simplified individual retirement account for employees (SEP IRA) is a retirement account funded by business owners for their employees, offering growth in tax-deductible and tax-deferred investments until retirement. Once payments begin, they are taxed as income, similar to a traditional IRA. Self-employed people can also open an SEP IRA for themselves. What is an IRA and what types of IRA are there? Get answers to frequently asked questions about this tax-advantaged retirement savings tool.
In the case of traditional IRAs, your contributions can be tax-deducted on your federal income tax return, which can reduce your taxable income for the year. If you meet the requirements, you can also avoid the 10% early withdrawal penalty. Please note that unqualified distributions will only be taxed (and may even be penalized) on the investment gains portion of the distribution and only to the extent that their distribution exceeds the total amount of all contributions you have made. Be sure to add your Roth IRAs when calculating the tax consequences of a distribution.
Another benefit of Roth IRAs is that distributions are not required after age 72 or at any point in life. You can postpone distributions until you need the income, or you can leave the balance to your beneficiary without making a distribution. Owners of inherited Roth IRAs are required to accept distributions. Traditional and Roth IRAs don't offer equivalent contributions from an employer.
There are several types of IRAs, including traditional IRA (deductible IRA and deductible spousal IRA), non-deductible IRA, and Roth IRA. An IRA can be established with an insurance company, bank, or investment company. An Ameriprise financial advisor can help you evaluate different types of retirement accounts and determine which one may be best for you, based on your personal situation and goals. Depending on the type of IRA you use, an IRA can lower your tax bill when you make contributions or when you withdraw money when you retire.