A:

The Roth IRA was established in 1996 as the newest addition to the individual retirement accounts (IRAs) available to individuals. Its tax treatment differs greatly from most other IRAs. Contribution limits are the same as those for Traditional IRAs, but tax deductions are not available on contributions to Roth IRAs. Unlike all other IRA types, ordinary income tax is not paid on withdrawals. At age 70.5, required minimum distributions (RMDs) are not required.

The simplified employee pension IRA (SEP IRA) allows self-employed individuals to contribute to retirement plans for themselves or their employees without involvement in a complex qualified plan. Many small employers favor SEP plans because of eligibility requirements for contributors, including minimum age of 21, at least three years of employment and a $500 compensation minimum. In addition, an SEP IRA allows employers to skip contributions during years when business is down. Contributions made by employers cannot exceed the lesser of 25% of an employee's compensation, or $46,000 maximum (for 2008). As with the Traditional IRA, withdrawals from SEP IRAs in retirement are taxed as ordinary income.
However, age 70.5 withdrawal requirements apply.

The Traditional IRA is the most common type of IRA. Millions of 401(k) and other company retirement plans are rolled over into Traditional IRAs each year when workers retire or change employers. Unlike the Roth, tax deductions for annual contributions may apply to this type of IRA when income falls below certain limits. Unfortunately, the IRS views those funds as pretax contributions and, when withdrawals are made later in life, the withdrawals are then taxed as ordinary income. At age 70.5, Traditional IRA holders are required to take RMDs.

(For more on this topic, read Which Retirement Plan Is Best? and Individual Retirement Accounts.)

This question was answered by Steven Merkel.

RELATED FAQS
  1. What are the main differences between a Simplified Employee Pension (SEP) IRA and ...

    Discover the difference between a simplified employee pension IRA and a traditional IRA so that you can choose the best retirement ... Read Answer >>
  2. Can an individual contribute to both a Roth IRA and a Traditional IRA in the same ...

    Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into ... Read Answer >>
  3. Can I contribute to both a SEP IRA and a regular IRA?

  4. I want to take advantage of retirement savings. Can I contribute $6K to a Roth IRA, ...

  5. How does a Simplified Employee Pension (SEP) IRA work?

    Learn about a Simplified Employer Pension, or SEP, IRA and how it works, who participates and what advantages it has over ... Read Answer >>
  6. Can I hold multiple IRAs?

    IRAs are investments made to plan for retirement, which offer certain tax advantages, depending on the type, and often matching ... Read Answer >>
Related Articles
  1. Retirement

    Roth IRA Contribution Limits in 2016

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  2. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
  3. IRAs and Roth IRAs

    What IRAs are: Tax-advantaged savings accounts for individuals. Pros: Tax benefits; investments grow tax-deferred and contributions may be deductible; numerous investment choices with range of ...
  4. Financial Advisors

    IRAs: Top Things You Need to Know About Them

    By understanding the major rules for both traditional and Roth IRAs, you'll be prepared to enjoy the benefits of these investment opportunities.
  5. Taxes

    Roth IRA Vs. Traditional IRA

    Learn more about the differences between a Roth IRA and traditional IRA.
  6. Retirement

    The Best Bet for Taxes: Traditional or Roth IRAs?

    Choosing a Traditional IRA over a Roth IRA, or vice versa, depends on financial situation and long-term goals, especially if you want to trade.
  7. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
  8. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  9. Retirement

    6 Reasons Not to Recharacterize Your Roth IRA

    If you're thinking of recharacterizing your Roth IRA into a traditional IRA account, here are six compelling reasons why you should reconsider.
  10. Products and Investments

    7 Top IRA Strategies for Your Clients

    With IRA season in full swing, advisors should consider these seven strategies for clients.
RELATED TERMS
  1. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  2. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  3. Roth IRA

    An individual retirement plan that bears many similarities to ...
  4. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  5. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  6. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
Trading Center