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What is an Individual Retirement Account?

What is an Individual Retirement Account? Blog image
Affinity FCU Blog
By: AffinityFCU

As the name implies, an individual retirement account (IRA) is an account that can help you save and invest for your retirement. Even if you already have a 401(k) or other retirement account, an IRA could help supplement your golden years. There are four main types of IRA accounts, each with its own features.

Traditional IRA

  • Contributions may be tax-deductible.
  • Earnings may grow tax-deferred until you withdraw funds upon retirement. This can be a pro or con depending on your tax bracket now and when you retire.

Roth IRA

  • Contributions are made with after-tax money (you've already paid taxes on it).
  • As a result, your money may grow tax-free. You may also have tax-free withdrawals in retirement under certain conditions.

SEP IRA

  • Specifically for self-employed individuals (independent contractors, freelancers, and small-business owners).
  • Adheres to the same tax rules for withdrawals as a traditional IRA.
  • Business owners can set up SEP IRAs for their employees and can deduct the contributions they make on behalf of employees.
  • Employees can’t contribute to their own accounts, and the IRS taxes withdrawals as income.

Contribution Limit for Traditional, Roth and SEP IRAs

The IRA contribution limit for 2023 – whether you have one, two or all three IRAs – is $6,500 for those under age 50, and $7,500 for those age 50 or older.

You can learn more about these IRAs at investopedia.com.

What about a Simple IRA

A Simple IRA is an employer-sponsored plan, which means it is offered to employees through small businesses with 100 or fewer employees. A Simple IRA follows the same tax rules for withdrawals as a traditional IRA. Unlike SEP IRAs, employees can contribute to their accounts, and the employer must contribute, too. All contributions are tax-deductible.

You can learn more about Simple IRAs from the IRS.

Should you invest in an IRA?

According to some financial experts, retirees may need up to 85% of pre-retirement income in retirement. A 401(k) alone might not get you there. That’s why an IRA may be a good option, plus an IRA can help you gain access to a wider range of investment options than employer-sponsored plans.

As with all investment decisions, consult your financial advisor before investing.