The Internal Revenue Service (IRS) recognizes four different types of individual retirement accounts (IRAs). An IRA is an investment vehicle created to help people save for retirement. The various types of accounts range in tax benefits and disbursement rules but basically are meant to provide middle-income citizens a way to invest in the stock market and grow their savings while they work.
Individual Accounts
Two basic individual accounts can be set up with a cash deposit or through payroll deductions. A traditional IRA allows investors who earn below a certain threshold each year to invest their own money in a savings plan that is invested in various stock options. A traditional IRA is developed with money that is tax-deductible in the year the investment was made. The interest made on the investment also is not taxed until the IRA is distributed after the investor turns 59-and-a-half. A Roth IRA follows most of the same rules as a traditional IRA, except it is built from money that is taxed before it is invested. No additional taxes are required at the time of distribution, including the interest earned. Both a traditional and a Roth IRA can be set up through banks and other financial institutions.
SEP
A Simplified Employee Pension plan (SEP) is an IRA typically set up by employers. Any size business can set up an SEP for its employees. Self-employed investors can set up their own SEPs to build their retirement savings as well. SEPs are relegated to those businesses that do not have any other retirement vehicle plans set up for employees. An SEP usually has lower set-up and administrative fees than other retirement pension plans, and contributions, although limited, can be flexible to fit the employer's annual cash flow. Employees cannot make contributions to an SEP but are 100 percent vested at all times.
SARSEP
The Salary Reduction Simplified Employee Pension (SARSEP) plan is a simple IRA that was set up by an employer prior to rule changes in 1997. The SARSEP allowed employees to make additional contributions to the employer-funded IRA in addition to the employer-made retirement contributions. No new SARSEP plans were allowed to be opened after January 1, 1997, but employees who owned a SARSEP prior to the cut-off date can maintain those accounts until they retire.
Simple IRA
A Savings Incentive Match Plan for Employees (Simple) is an IRA that is set up by employers for their employees into which both can make contributions, subject to various limits that often change from year to year, much like other IRA accounts. Simple IRA plans typically are set up by employers with fewer than 100 employees but also can be utilized by the self-employed. Simple IRA plans are easy to establish through banks and other financial institutions. Only employers with no other retirement options are eligible for Simple IRA plans.
Member Comments