Individual Retirement Accounts (“IRAs”) are a type of retirement savings vehicle that can hold, cash, stocks, bonds, mutual funds, and exchange-traded funds. Self-directed IRAs can hold other types of assets such as stock in private companies, precious metals or real estate.
Several different types of individual retirement accounts (IRAs) exist to meet various needs.
- Roth IRA: After-tax dollars are contributed and grow tax-free. When withdrawn, no taxes are owed under current tax law. Additionally, you are not required to make any withdrawals during your lifetime. The maximum contribution you can make to a Roth IRA in 2023 is $6,500 ($7,500 if you are age 50 or older).
- Traditional IRA: The equivalent of pre-tax dollars is contributed and grows tax-deferred. When withdrawn, taxes are owed on the amount withdrawn. Under current tax law, you will be required to start taking mandatory withdrawals between ages 72 and 75, depending on the year you were born. The maximum contribution you can make to Traditional IRA in 2023 is $6,500 ($7,500 if you are age 50 or older).
- SIMPLE IRA: A retirement plan available to most small businesses (fewer than 100 employees), including self-employed individuals. It functions like a Traditional IRA although a Roth option will be available in 2023. The maximum contribution an employee can make to a SIMPLE IRA in 2023 is $15,500 ($19,000 if you are age 50 or older). An employer can match up to 3% of an employee’s compensation for the entire year.
- SEP IRA: A retirement plan for self-employed people and small business owners. It functions like a Traditional IRA although a Roth option will be available in 2023. The maximum contribution you can make to a SEP IRA in 2023 is the lesser of 25% of compensation or $66,000, a substantially larger amount than any of the other options discussed.
Determining which IRA is right for you depends on multiple variables and should be carefully considered to maximize your long-run after-tax dollars.