The best IRA is the one that best fits with your needs. Each individual and couple has their own financial needs and goals, so it is impossible to choose one IRA and declare it the best fit for everyone. There are four different types of IRAs, or individual retirement accounts, used for retirement planning. There is an additional type of IRA, known as an educational IRA that is used to set aside money for education.
The four types of IRAs used for retirement are Traditional, SEP-IRA, Simple, and Roth. To decide which is the best IRA for you, it helps to understand the basic facts about each. It is important to remember that this is only a guideline, and any IRA decision should be discussed with a financial planner.
A traditional IRA allows you to contribute $2000 US dollars (USD) annually for retirement. You can normally deduct some or the entire contributed amount on your taxes. The amount that you deduct is decided by the amount of your adjusted gross income and whether you are also covered under a retirement plan by your employer. It is important to realize that just because you are eligible to contribute to a traditional IRA does not mean that you can deduct the full amount on your taxes.
Another form of IRA is the Simplified Employee Pension IRA, commonly known as the SEP-IRA. The SEP-IRA is established and funded by the employer. The employee can also contribute to this account, up to 15% of their compensation. Many of those that operate their own businesses choose SEP-IRAs as their retirement savings plan of choice.
The Simple IRA is another IRA that is administered by the employer. The employer funds the account, and the employee can contribute as well. While the amount of money that is contributed cannot exceed $6500 USD, it can be up to 100% of your compensation. This may be the best IRA choice for individuals that operate a small business on the side.
Roth IRAs do not provide a tax benefit when you contribute money into them, but they can provide an excellent savings vehicle for later in life. Because you pay taxes on the money before it is contributed to the Roth IRA, when you withdraw the money it is tax-free income. All of the interest you earned over the years is tax free as well. The Roth IRA can be an excellent retirement savings plan for those who meet the income guidelines, which is $95,000 USD for single people and $150,000 USD for couples.
There are clearly many factors to consider when deciding what the best IRA is for you and your family. For someone who owns their own business the SEP-IRA and Simple IRA may make an excellent choice for you and your employees. If you work for someone else but would like to save additional money for your retirement, you may want to consider a Traditional or Roth IRA.