Meet the entire IRA family

By elitecpas | February 21, 2017 |

Tax Myth #34:
All IRAs are the same.

We get this question quite often during tax season, “All IRAs are the same, right?”

IRAs actually come in a number of varieties. The two most common types are the traditional IRA and Roth IRA.

With a traditional IRA, the money you contribute typically goes in tax-free; but once you reach retirement, your withdrawals are taxed as ordinary income.
Roth IRAs work the opposite way, in that contributions are made with after-tax dollars, but withdrawals can be made tax-free in retirement. The annual contribution limit for both traditional and Roth IRAs in 2017 is $5,500 if you’re under 50, or $6,500 if you’re 50 or older.

Not everyone can open a Roth IRA, though. If you earn more than $133,000 as a single tax filer this year, or more than $196,000 as a married couple filing jointly, you won’t be eligible to contribute to a Roth.
Within the IRA family there’s a close cousin called the SEP-IRA, which is an option if you’re self employed or run a small business. The money you contribute to a SEP-IRA goes in pre-tax; withdrawals are taxed in retirement, but the annual limit is much higher than that of a traditional IRA. For 2017, you can contribute up to a quarter of your income, for a maximum of $54,000.

The IRA family tree also includes the SIMPLE-IRA, which is another tool geared toward small-business owners and the self-employed. SIMPLE-IRA contributions go in tax-free and are taxed upon withdrawal. But like SEP-IRAs, SIMPLE IRAs allow savers to sock away more money each year for retirement. For 2017, the annual contribution limit is $12,500 if you’re under 50. If you’re 50 or older, you can put in up to $15,500. Employers are also required to match employee contributions to a certain degree, so if you work for a small business that offers this type of IRA, you’ll get some extra money on top of what you put in. If you’re self-employed and open a SIMPLE-IRA, you’ll get to contribute as both employer and employee.

All the abbreviation and acronyms can get rather confusing. Contact us and we’ll help you make the best decision for your business.