PLANS FOR EVERY TYPE OF INVESTOR
Deciding which type of IRA to hold your retirement plan is an important financial decision. While many IRAs offer a way to save for retirement, each type — Traditional, Roth, SEP or SIMPLE — offer distinct advantages when it comes to taxation, required distributions and payouts, penalty structures and exceptions, age requirements and more. See which type of self-directed IRA is right for you.
TRADITIONAL IRA
A Traditional IRA gives individuals the opportunity to direct pretax income towards investments that can grow tax-deferred. Another plus, no capital gains or dividend income is taxed until it is withdrawn. TOWER gives you access to a wide array of investment opportunities through a self-directed Traditional IRA, which makes it a great complement to a conventional Roth or Traditional IRA. Many investors choose to have multiple IRAs as a way to truly diversify their portfolios.
Traditional IRA features:
- Annual tax deductible contributions are based on income level.
- Withdrawals can begin at age 59½ and are mandatory by age 70½.
- Taxes are paid on earnings when withdrawn from the IRA.
- Anyone with earned income under age 70½ can contribute up to the annual maximum limit. See our IRA Annual Limits chart.
- Funds withdrawn before age 59½ are subject to a 10% penalty unless an exception applies.
- Traditional IRAs may be converted to Roth IRAs by paying income taxes (but no tax penalties) on the IRA distribution before rolling over to a Roth IRA, regardless of income limits.
Before making contributions to a Traditional IRA, be sure to know the contribution rules and limits that apply.
ROTH IRA
A Roth IRA gives you the opportunity to set aside after-tax income up to a specified amount each year. Earnings on the account and withdrawals are tax-free after age 59½.
Roth IRA features:
- Annual contributions are not tax deductible, but eligibility depends on income level.
- All earnings and principal are 100% tax-free as long as you follow the IRS rules.
- Eligibility is determined based on income; see our IRA Annual Limits chart.
- Mandatory distributions at age 70½ are not required.
- Traditional, SIMPLE and SEP IRAs may all be converted to Roth IRAs by paying income taxes (but no tax penalties) on the IRA distribution before rolling over to a Roth IRA, regardless of income limits.
- Principal contributions can be withdrawn any time without penalty as long as the required five-year holding period is met.
Before making contributions to a Roth IRA, be sure to know the contribution rules and limits that apply.
TRADITIONAL IRA VS. ROTH IRA
Compare the differences between Traditional and Roth IRAs:
TRADITIONAL
- Annual contributions are tax deductible
- Mandatory withdrawal at 70½ years of age
- Taxes are paid on earnings when withdrawn from the IRA
- Funds withdrawn before age 59½ are subject to a 10% penalty
ROTH
- Annual contributions are not tax deductible
- Mandatory withdrawal or distributions at 70½ years of age is not required
- Earnings and principal are tax-free as long as you follow the IRS rules
- Principal contributions can be withdrawn any time without penalty as long as the required five-year holding period is met
SEP IRA
SEP is an acronym for Simplified Employee Plan and is a retirement plan that’s established by an employer. An SEP IRA permits employers to make deductible contributions which are made to a Traditional IRA.
SEP IRA features:
- Employers can choose how much they want to contribute to an SEP in any given year, with a contribution limit of up to 25% of earned income.
- With an SEP plan, each eligible employee has their own IRA account associated with the SEP.
- If an employer makes a contribution for themselves, they must also make a contribution for all eligible employees.
- SEPs can be opened by any type of business entity, including a sole proprietorship, a corporation or a partnership with up to 100 employees. In the case of sole proprietorships, the business owner is considered the employee for plan purposes.
- Each year employers can choose whether or not to fund the account, depending on the business cycle that year.
- Once funded, SEP contributions are 100% vested.
Before making contributions to a SEP IRA, be sure to know the contribution rules and limits that apply.
SIMPLE IRA
SIMPLE is an acronym for Savings Incentive Match Plan for Employees (SIMPLE). A SIMPLE IRA allows employers to plan for their employees’ retirement and their own.
SIMPLE IRA features:
- Specifically designed for small businesses with 100 or fewer employees
- Employees can make salary-reduced contributions and receive matching contributions from their employer
- Employers may also decide to make a non-elective contribution to all eligible employees’ accounts rather than making matching contributions
- If your business exceeds the 100-employee limit, you can be eligible to continue the plan for up to two years
- Employers are required to match the employee’s contributions up to 3%
- Once SIMPLE IRAs are funded, the account is 100% vested to the employee
Before making contributions to a SIMPLE IRA, be sure to know the contribution rules and limits that apply.
SEP IRA VS. SIMPLE IRA
Compare the differences between SIMPLE and SEP IRAs:
SEP IRA:
- Best suited for smaller family-owned businesses or businesses with no employees
- Accounts can be opened by any type of business entity
- Employers can choose to fund or not to fund the account each year
- Once the account is funded, it is 100% vested to the employee
SIMPLE IRA:
- Best suited for small businesses with 100 or fewer employees
- Accounts can only be opened by certain types of business entities
- Employers are required to match the employee’s contributions up to 3%
- Once the account is funded, it is 100% vested to the employee