{"id":18332,"date":"2022-02-15T08:36:00","date_gmt":"2022-02-15T13:36:00","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=18332"},"modified":"2024-04-03T10:37:15","modified_gmt":"2024-04-03T14:37:15","slug":"types-of-ira-ansh","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/types-of-ira-ansh\/","title":{"rendered":"What are the Best Types of IRA for My Retirement Goals?"},"content":{"rendered":"\n<p><em>Updated 3\/26\/2024<\/em><\/p>\n\n\n\n<p>When I first started investing, trying to understand all of the lingo and complicated methods was simply overwhelming. Many of us have likely heard of retirement accounts, but chances are, we have no idea what they do or why they\u2019re there. <\/p>\n\n\n\n<p>That\u2019s the exact reason why I want to dive into Individual Retirement Accounts (IRAs) and answer the question, \u201cWhat Types of IRA Best Fit My Life?\u201d<\/p>\n\n\n\n<p>Even if you are an investor and are pretty well-versed in personal finance, I\u2019d be willing to bet that you wouldn\u2019t be able to list all of the different types of IRAs that exist. I know that I wasn\u2019t.<\/p>\n\n\n\n<p>Most of you would know the <strong>Roth and Traditional IRA<\/strong>, and maybe a couple would be familiar with a <strong>SEP IRA<\/strong> or a <strong>Spousal IRA<\/strong>, but there are still three more lesser-known, but still worth considering, accounts.<\/p>\n\n\n\n<p>Yes, there are <strong>seven different IRAs<\/strong>! <\/p>\n\n\n\n<p>That might sound a bit overwhelming, so let\u2019s start with some of the basics.<\/p>\n\n\n\n<p>Click to jump to a section:<\/p>\n\n\n\n<ul>\n<li><a href=\"#whatis\">What Even Is an IRA?<\/a><\/li>\n\n\n\n<li><a href=\"#trad\">Traditional IRA<\/a><\/li>\n\n\n\n<li><a href=\"#roth\">Roth IRA<\/a><\/li>\n\n\n\n<li><a href=\"#sep\">SEP IRA<\/a><\/li>\n\n\n\n<li><a href=\"#nonded\">Nondeductible IRA<\/a><\/li>\n\n\n\n<li><a href=\"#spousal\">Spousal IRA<\/a><\/li>\n\n\n\n<li><a href=\"#simple\">SIMPLE IRA<\/a><\/li>\n\n\n\n<li><a href=\"#self\">Self-Directed IRA<\/a><\/li>\n<\/ul>\n\n\n\n<p class=\"anchor\" id=\"whatis\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Even Is an IRA?<\/h2>\n\n\n\n<p>As I mentioned before, an IRA is an <strong>Individual Retirement Account<\/strong>. You might be familiar with a 401k sponsored through your employer, which is similar, except an IRA is independent of your employer.<\/p>\n\n\n\n<p>You can open an IRA with almost any <a href=\"https:\/\/einvestingforbeginners.com\/robinhood-alternatives-ashul\/\" target=\"_blank\" rel=\"noreferrer noopener\">brokerage firm<\/a> you want, and they will offer you this option as an account.<\/p>\n\n\n\n<p>You would want to open an IRA because it gives you a <strong>pretty significant tax advantage<\/strong>, either when your money goes into the account or when you pull it out, depending on the IRA that you choose.<\/p>\n\n\n\n<p>In return for this tax advantage, <strong>your money has to stay in the IRA until you\u2019re at least 59.5 or older<\/strong>. You cannot pull out any more funds than you\u2019ve contributed unless you want to pay taxes and a 10% penalty. Hard pass on that!<\/p>\n\n\n\n<p>For the most part, that\u2019s an IRA for you. Of course, with seven different versions, there are intricacies to them all, so let me touch on those quickly.<\/p>\n\n\n\n<p class=\"anchor\" id=\"trad\"><\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\">Traditional IRA<\/h2>\n\n\n\n<p>A traditional IRA is <strong>funded with pretax money<\/strong>, meaning that your money will go into the account tax-free. On the flip side, that means that <strong>when you decide to withdraw money from your account, you\u2019re going to have to pay taxes on it at your current income tax rate<\/strong>.<\/p>\n\n\n\n<p>In 2024, <strong>the contribution limit is $7K for Traditional IRAs<\/strong>, meaning that\u2019s the maximum that any person can put into their IRA for that year. Now, if you\u2019re over 50, there is a thing called <strong>\u201ccatch up\u201d contributions<\/strong> where you can put in an additional $1K each year for a total of $8K.<\/p>\n\n\n\n<p>To contribute to a Traditional IRA, your income has to be under $77K if you\u2019re single\/Head of Household or $116K if you\u2019re married and filing jointly. These incomes are relatively low compared to some of the other IRA options which might seem surprising, but you have to take a step back and think about it from the government\u2019s perspective.<\/p>\n\n\n\n<p>The government, like anyone else, wants its money now. When you pick a pretax IRA like the Traditional IRA, you\u2019re choosing to pay taxes later rather than now, aka delaying when the government gets its tax money.<\/p>\n\n\n\n<p>To deter this from happening, the IRS puts lower income limits so you can phase out faster, and this is no longer a viable option for you. At that point, you will likely make a move to an after-tax IRA.<\/p>\n\n\n<div class=\"wp-block-image shadow-effect\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2021\/08\/Traditional-IRA-1-410x1024.png?strip=all&lossy=1&w=2560&ssl=1\"><img decoding=\"async\" src=\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2021\/08\/Traditional-IRA-1-410x1024.png?strip=all&lossy=1&ssl=1\" alt=\"traditional IRA diagram\"\/><\/a><\/figure><\/div>\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best for?<\/h3>\n\n\n\n<p>At the end of the day, the debate of <a href=\"https:\/\/einvestingforbeginners.com\/roth-vs-traditional-401k-calculator-ansh\/\" target=\"_blank\" rel=\"noreferrer noopener\">Roth vs. Traditional<\/a> comes down to one question &#8211; <span style=\"text-decoration: underline;\">do you think your taxes will be higher now or when you need the money in retirement?<\/span><\/p>\n\n\n\n<p><strong>The Traditional IRA is best for people who think their taxes are higher now.<\/strong> For example, maybe you\u2019re in the 32% tax bracket now and think you\u2019ll be in the 22% tax bracket in retirement. If so, it makes sense to save 32% in taxes now and then pay 22% later, a net gain of 10%.<\/p>\n\n\n\n<p class=\"anchor\" id=\"roth\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Roth IRA<\/h2>\n\n\n\n<p>The Roth IRA is the exact opposite of the Traditional IRA. <strong>You\u2019re going to pay taxes now<\/strong> and then <strong>when you withdraw money from your IRA, that money will be completely tax-free<\/strong>. In other words, whatever your account balance is at that moment in time is exactly the amount of money that you\u2019ll be able to pull out and not pay a penny of taxes.<\/p>\n\n\n\n<p>The contribution limits are the same at $7K and an additional $1K for catch-up contributions as of 2024.<\/p>\n\n\n\n<p>The income limits, however, are much different. To make the full contribution, <strong>single filers and heads of Households must make under $161K in 2024<\/strong>, but they can still contribute a smaller amount up to $144K.<\/p>\n\n\n\n<p>If married filing jointly, the income limit is $153K and becomes completely phased out at $240K.<\/p>\n\n\n\n<p>If you\u2019re unsure if you\u2019ll be over the Roth IRA max or not, I recommend setting aside money in a brokerage account until you can determine your annual income. If you\u2019ll be under the limit, simply transfer that money from your brokerage into the Roth. If you\u2019re over the income limit, then you can let it sit or maybe check out another option I\u2019ll discuss later.<\/p>\n\n\n\n<p>Additionally, you can withdraw any contributions that you\u2019ve made at any time for any reason and not pay taxes or fees. This can give you some ultra flexibility if you were to ever need it.<\/p>\n\n\n<div class=\"wp-block-image is-resized\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2021\/08\/Roth-IRA.png?strip=all&lossy=1&w=2560&ssl=1\"><img decoding=\"async\" src=\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2021\/08\/Roth-IRA.png?strip=all&lossy=1&w=800&ssl=1\" alt=\"roth ira summary diagram\"\/><\/a><\/figure><\/div>\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best for?<\/h3>\n\n\n\n<p>The Roth IRA is the opposite of the Traditional IRA and <strong>is best for people who think their taxes will be higher in retirement<\/strong>.<\/p>\n\n\n\n<p>Additionally, the Roth IRA is best for those who want a bit more flexibility to withdraw funds if a crisis occurs and treat the contributions like a pseudo-<a href=\"https:\/\/einvestingforbeginners.com\/starter-emergency-fund-ashul\/\" target=\"_blank\" rel=\"noreferrer noopener\">emergency fund<\/a><span style=\"text-decoration: underline;\">.<\/span><\/p>\n\n\n\n<p>The Roth IRA is also great for those who just want peace of mind. Once you\u2019ve paid taxes, you\u2019re done. Your future tax rate doesn\u2019t matter. Your account balance is what you get. It\u2019s very beneficial to have some tax-free income in retirement.<\/p>\n\n\n\n<p class=\"anchor\" id=\"sep\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">SEP IRA<\/h2>\n\n\n\n<p>A SEP IRA, or <strong>Self-Employed Pension IRA<\/strong>, is funded by an employer for its employees. It is a type of Traditional IRA in the sense that <strong>money goes in pretax and is taxed when the account holder withdraws it<\/strong>.<\/p>\n\n\n\n<p>Most people likely will not qualify for a SEP IRA because of their employment status, but those that do can find it to be extremely beneficial. There are some <a href=\"https:\/\/www.investopedia.com\/ask\/answers\/102714\/how-does-simplified-employee-pension-sep-ira-work.asp\" target=\"_blank\" rel=\"noreferrer noopener\">specific rules for having a SEP IRA<\/a>, though, so I highly encourage you to do some major investigation before opening.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best for?<\/h3>\n\n\n\n<p><strong>The SEP IRA is best for self-employed people<\/strong> because it has minimal administration and setup costs. Additionally, the contribution limits are much higher, at $69K in 2024.<\/p>\n\n\n\n<p class=\"anchor\" id=\"nonded\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Nondeductible IRA<\/h2>\n\n\n\n<p>This is my least favorite kind of IRA. If your income is above the IRA income limits, you can contribute after-tax dollars, similar to a Roth IRA, but those funds will be put into a Traditional IRA. The benefit of doing this is these funds will grow on a tax-deferred basis, meaning you won\u2019t pay any taxes while your money is still in the IRA, but when you withdraw it, you\u2019ll pay taxes on all of your growth.<\/p>\n\n\n\n<p>As I mentioned, I hate this option. <strong>You don\u2019t avoid taxes on either the pretax or after-tax side, and your money is tied up in the IRA until you\u2019re 59.5 at a minimum<\/strong>. So, no tax advantage and no flexibility to pull this money out if you need it at any point in time.<\/p>\n\n\n\n<p>Pretty awful, right? It\u2019s a lose-lose. If you\u2019re over the income limit, you might as well just put your money into a brokerage account so you have the ability to <a href=\"https:\/\/einvestingforbeginners.com\/tax-efficient-investing-ansh\/\" target=\"_blank\" rel=\"noreferrer noopener\">tax-loss harvest<\/a> and also withdraw the funds if\/when you need them.<\/p>\n\n\n\n<p>Now, believe it or not, there is one scenario where I LOVE the Nondeductible IRA. You can perform something called a <a href=\"https:\/\/einvestingforbeginners.com\/mega-backdoor-roth-ira-ashul\/\" target=\"_blank\" rel=\"noreferrer noopener\">Backdoor Roth conversion<\/a>, where basically you put money into the nondeductible IRA and then immediately transfer it into a Roth IRA. Once in the Roth IRA, your money can grow tax-free in perpetuity.<\/p>\n\n\n\n<p>It\u2019s simply just a workaround for the income limits that the IRS has put in place. Sounds too good to be true, right? Well, it might be. The Backdoor Roth has been in recent conversations to be disallowed but as of February 2022, we\u2019re still in business!<\/p>\n\n\n\n<p>If you\u2019re thinking about doing the Backdoor Roth, just do a little bit of research before execution to save yourself some time, money, and a massive headache.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best for?<\/h3>\n\n\n\n<p>The Non-Deductible IRA is best for those who are over the Roth IRA contribution limits but still want to save more for your retirement plan via the backdoor Roth.<\/p>\n\n\n\n<p>If the Backdoor Roth were to ever disappear, I\u2019d struggle to find a scenario in which it would be more beneficial than investing in a brokerage account.<\/p>\n\n\n\n<p class=\"anchor\" id=\"spousal\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Spousal IRA<\/h2>\n\n\n\n<p>Spousal IRAs are an amazing hack for people to take advantage of. Normally, to qualify to contribute to an IRA, you have to have earned income in that tax year, but <strong>with a spousal IRA, you can contribute funds for your spouse if they are not employed or have very little income and you file your taxes jointly<\/strong>.<\/p>\n\n\n\n<p>The contribution limits are the same as they are for a working person, so for 2024, you could theoretically contribute $7K to your IRA and $7K to the Spousal IRA.<\/p>\n\n\n\n<p>In theory, this is an excellent option to have one spouse work at home and still have some sort of retirement option because they won\u2019t have a <a href=\"https:\/\/einvestingforbeginners.com\/401k-alternatives-gnewl\/\" target=\"_blank\" rel=\"noreferrer noopener\">401k<\/a>, <a href=\"https:\/\/einvestingforbeginners.com\/403b-calculator-ashul\/\" target=\"_blank\" rel=\"noreferrer noopener\">403b<\/a>, or another employer-sponsored retirement plan. On the other hand, I imagine that those families that only have one income likely might be in a pinch to be able to max out one IRA, let alone an additional spousal IRA.<\/p>\n\n\n\n<p>And guess what &#8211; that\u2019s completely okay!<\/p>\n\n\n\n<p>The beauty of personal finance is that it has to fit into your life. Hell, with daycare costs the way that they are lately, anyone with a couple of kids in daycare must have a very high income even to sustain any sort of savings for retirement. Maybe a family can choose to have one parent stay at home to remove those daycare costs and then try to fund some of the spousal IRA.<\/p>\n\n\n\n<p>The beauty of this is that you can be flexible in your decision-making and <a href=\"https:\/\/einvestingforbeginners.com\/retirement-number-4-percent-ashul\/\" target=\"_blank\" rel=\"noreferrer noopener\">retirement-planning<\/a> process. You have options out there that fit the life that you want, so figure out what you want, and then have your retirement planning evolve around that.<\/p>\n\n\n\n<p>I have a friend whose wife stays home with their kids three days\/week and works the other two days. When she goes to work, they make a minimal amount more than if she would stay home, but it\u2019s simply good for her to have adult interaction.<\/p>\n\n\n\n<p>I also have friends who both make $100K+, and when the first kid comes around, one of them is going to stay home with their child. Daycare is about $20K\/year so they\u2019re giving up, let\u2019s say, $50K or so of after-tax money.<\/p>\n\n\n\n<p>That\u2019s an awful financial decision, but it\u2019s an A+ personal decision. The spousal IRA is literally for this scenario. Figure out your home life and if it\u2019s one parent staying at home, know that you have the Spousal IRA set for your use!<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best for?<\/h3>\n\n\n\n<p>A <strong>Spousal IRA is best for a married couple with one spouse having a zero-to-low income<\/strong>. It allows you to lean on the majority of the \u201cbreadwinners\u201d income to fully max out two separate IRAs.<\/p>\n\n\n\n<p class=\"anchor\" id=\"simple\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">SIMPLE IRA<\/h2>\n\n\n\n<p>A SIMPLE IRA, short for <strong>Savings Incentive Match Plan for Employees<\/strong>, is <strong>an excellent option for those who are self-employed or in a small company<\/strong>. Often, a SIMPLE IRA will be offered to employees instead of a 401k because it\u2019s a cheaper, more flexible option with many of the same benefits.<\/p>\n\n\n\n<p>Employers are required to offer their employees a match, typically up to 3%, as you would commonly see in a 401k.<\/p>\n\n\n\n<p>One of the main differences between a SIMPLE IRA vs. a 401k is that the SIMPLE IRA contribution limit is much lower, sitting at $16K in 2024 vs. the 401k contribution limit of $23,000.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best for?<\/h3>\n\n\n\n<p><strong>The SIMPLE IRA is best for small businesses that aren\u2019t able to contribute more than the contribution limit, or those that have their own business as a side hustle<\/strong> and can use this SIMPLE IRA in addition to their 401k with their full-time employer.<\/p>\n\n\n\n<p class=\"anchor\" id=\"self\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Self-Directed IRA<\/h2>\n\n\n\n<p>A Self-Directed IRA operates under <strong>the same rules and contribution limits as Traditional and Roth IRAs<\/strong>, but the critical difference is that <strong>your investment options are much more vast<\/strong>.<\/p>\n\n\n\n<p>In addition to the standard options that most IRAs let you invest in like stocks and bonds, a <strong>Self-Directed IRA allows you to invest in things like crypto, real estate, small businesses &amp; startups<\/strong>.<\/p>\n\n\n\n<p>There are some <a rel=\"noreferrer noopener\" href=\"https:\/\/directedira.com\/\" target=\"_blank\">intricacies to having a self-directed IRA<\/a> that you need to understand, so please make sure you do some further due diligence before opening one. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Who is this best<strong> <\/strong>for?<\/h3>\n\n\n\n<p>A<strong> self-directed IRA is best for the well-experienced investor that wants to find a tax-advantaged way to invest in some high-risk, high reward options<\/strong>. A bit like <a href=\"https:\/\/seekingalpha.com\/news\/3710024-how-did-peter-thiel-accumulate-5b-in-a-tax-free-roth-ira?gclid=Cj0KCQiA9OiPBhCOARIsAI0y71DoGzbmBgBueOJdI9Qfsc8AWaQjAOnTbrIUPTAyZIp0jAIYJVRWwbwaAg9jEALw_wcB&amp;utm_campaign=14049528666&amp;utm_medium=cpc&amp;utm_source=google&amp;utm_term=137460309828%5Edsa-1455881688143%5E%5E555764444353%5E%5E%5Eg\" target=\"_blank\" rel=\"noreferrer noopener\">Peter Thiel!<\/a> <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Summary<\/h2>\n\n\n\n<p>Many people think of IRAs in black and white.<\/p>\n\n\n\n<ul>\n<li>Pretax or after-tax?<\/li>\n\n\n\n<li>If I\u2019m over the income limit I\u2019m out of options.<\/li>\n\n\n\n<li>If only one spouse has earned income you can only contribute to one IRA.<\/li>\n\n\n\n<li>$6K each year and that&#8217;s it.<\/li>\n<\/ul>\n\n\n\n<p>I urge you to think outside the box because there are other options for you. Just because you don\u2019t fit the criteria of the common Roth IRA doesn\u2019t mean you\u2019re done. Be creative!<\/p>\n\n\n\n<p>Maybe it\u2019s by taking a look at one of these other great IRA options. Or maybe it\u2019s by <a href=\"https:\/\/einvestingforbeginners.com\/does-hsa-roll-over-ansh\/\" target=\"_blank\" rel=\"noreferrer noopener\">maxing out your HSA instead (which I prefer over an IRA).<\/a><\/p>\n\n\n\n<p>At the end of the day, do what you can to have your money work for you in the most effective way possible, and once you\u2019ve figured out the best account, it\u2019s time you look at the <a href=\"https:\/\/get.einvestingforbeginners.com\/sather-research\/\" target=\"_blank\" rel=\"noreferrer noopener\">Sather Research eLetter!<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Updated 3\/26\/2024 When I first started investing, trying to understand all of the lingo and complicated methods was simply overwhelming. Many of us have likely heard of retirement accounts, but chances are, we have no idea what they do or why they\u2019re there. That\u2019s the exact reason why I want to dive into Individual Retirement [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[5967,5948],"tags":[],"yst_prominent_words":[],"_links":{"self":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/18332"}],"collection":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/comments?post=18332"}],"version-history":[{"count":4,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/18332\/revisions"}],"predecessor-version":[{"id":31152,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/18332\/revisions\/31152"}],"wp:attachment":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/media?parent=18332"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/categories?post=18332"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/tags?post=18332"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/yst_prominent_words?post=18332"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}