1. Analyzing The Best Retirement Plans And Investment Options: Introduction
  2. Analyzing The Best Retirement Plans And Investment Options: Annuities
  3. Analyzing The Best Retirement Plans And Investment Options: Bonds
  4. Analyzing The Best Retirement Plans And Investment Options: Cash Investments
  5. Analyzing The Best Retirement Plans And Investment Options: Direct Reinvestment Plans (DRIPS)
  6. Analyzing The Best Retirement Plans And Investment Options: 401(k)s And Company Plans
  7. Analyzing The Best Retirement Plans And Investment Options: Exchange Traded Funds (ETFs)
  8. Analyzing The Best Retirement Plans And Investment Options: Individual Retirement Accounts (IRAs)
  9. Analyzing The Best Retirement Plans And Investment Options: Mutual Funds
  10. Analyzing The Best Retirement Plans And Investment Options: Stocks
  11. Analyzing The Best Retirement Plans And Investment Options: Conclusion
  • What they are: An individual savings account with tax incentives.
  • Pros: Tax benefits - investments grow tax-deferred and contributions may be deductible; variety of investment options with wide range of risk/reward characteristics.
  • Cons: Early withdrawal penalties plus you may have to pay income tax on the amount; limits on annual contributions; eligibility restrictions.
  • How to invest: Directly through financial institutions including banks, mutual fund companies and brokerage firms.

IRA Basics
An IRA can be thought of as a savings account that has tax benefits. You open an IRA for yourself - that is why it is called an individual retirement account. If you have a spouse, you will each have a separate IRA. An important distinction to make is that an IRA is not an investment itself; rather, it is an account where you keep investments such as stocks, bonds and mutual funds. You get to choose the investments in the account, and can change the investments if you wish. There are several types of IRAs, including traditional, Roth, SEP and SIMPLE. In many cases, you can have more than one type of IRA as long as you meet certain requirements.
Traditional and Roth IRAs
The primary difference between traditional and Roth IRAs is when you pay taxes on the money that you contribute to the plan. With a traditional IRA, you pay taxes when you withdraw the money during retirement. With a Roth IRA, you pay taxes when you put the money into the account. The money grows tax free while it’s in either a traditional or Roth IRA.
Another difference between traditional and Roth IRAs is who can contribute. With traditional IRAs, almost anyone with earned income can contribute. With Roth IRAs, however, your income may prevent you from contributing. Ordinarily, you are able to contribute to a Roth IRA if your modified adjusted gross income is (current for tax year 2013):

  • Less than $188,000 if you are married, filing jointly
  • Less than $127,000 if you are single, head of household, or married, filing separately (and did not live with your spouse during the previous year)
  • Less than $10,000 if you are married, filing separately and you lived with your spouse at any point during the previous year

For 2013, you can contribute the smaller of $5,500 or your taxable compensation for the year to traditional or Roth IRAs.
Simplified Employee Pension IRAs, or SEP IRAs, are a type of traditional IRA for self-employed individuals and small business owners. You can open a SEP IRA if you are a business owner with one or more employees, or if you are an individual with freelance income. All employees must be included in the SEP if they are at least 21 years old, have worked for your business for three out of the previous five years, and if they have received at least $550 in compensation from your business. Contributions are tax deductible (for the business or individual) and go into a traditional IRA in the employee’s name, and employees are fully vested at all times. For 2013, contributions cannot exceed the lesser of 25% of the employee’s compensation or $51,000. Catch-up contributions are not permitted.
A SIMPLE IRA (Savings Incentive match Plan for Employees) is an IRA set up by a small employer for its employees. Unlike a SEP IRA, employees are allowed to contribute to SIMPLE IRAs. Eligible and participating employees can make salary reduction contributions up to a certain amount; for 2013, the employee can "defer" up to $12,000. In turn, the employer must make either a matching contribution up to 3% of your salary, or a nonelective contribution of 2% of your compensation.
Required Minimum Distributions
Individual retirement accounts, including traditional, Roth, SEP and SIMPLE IRAs, are subject to required minimum distributions (RMDs). In general, you must make withdrawals before April 1 of the year following the year you turn 70.5. For all subsequent years, you must take the RMD before December 31 of each year.
How much you are required to take depends on the account balance and your age. In general, the RMD is calculated by dividing the prior end-of-year balance by a life expectancy factor that is published in Tables in IRS Publication 590, Individual Retirement Arrangements. You will use a different table depending on your situation; for example, you would use the Joint and Last Survivor Table if your sole beneficiary of the account is your spouse, and he or she is more than 10 years younger than you are.

Analyzing The Best Retirement Plans And Investment Options: Mutual Funds

Related Articles
  1. Retirement

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  2. 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.
  3. Retirement

    Making Spousal IRA Contributions

    Eligibility requirements, contribution limits and tax deductions all change with one little ring.
  4. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  5. Retirement

    These IRA Contributions Will Cut Your 2015 Taxes

    No matter how you save for retirement, take advantage of the time between now and April 15, 2016, to add to your nest egg while cutting your tax bill.
  6. Investing

    IRAs vs. 401(k)s: Differences Between Roth and Traditional

    For each type of account, whether IRA or 401(k), you also need to decide whether you need a Roth or traditional version. Your tax status and other issues will determine which of these are open ...
  7. 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.
  8. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center