Retirement Investment

Types of IRA Accounts Guide for Starters: Roth, Traditional, Self-Employed, & Self-Directed – Compared

An IRA, an individual retirement account, is a tax-advantaged solution that individuals can use to save and invest earmark funds for retirement purposes. There are a few different IRA accounts, and each type of account is ideal for certain types of people. Some are more “automatic” and mostly managed by a third party, while others are self-directed.

Roth IRAs and Traditional IRAs are the main ones that most people know. The primary difference is that with a Roth IRA, you contribute after-tax dollars. Your money is allowed to grow tax-free. With a traditional IRA, your contributions include pre OR after-tax dollars, and your money will grow tax-deferred, with withdrawals taxed as current income around age 60. With a Roth account, you are typically allowed to make tax-free and penalty-free withdrawals after 59 ½ years of age.

A Roth account is ideal for individuals who expect to be part of a higher tax bracket when he/she starts taking withdrawals. Traditional IRA accounts are better suited for individuals who expect to remain in the same tax bracket – or even lower – when he/she starts taking out withdrawals.

Take the time to compare these two major types of IRA accounts a bit more to learn more details, such as what kinds of investments you may or may not be allowed to make and how much stock you can own. If you’re interested in real estate, you must be very careful since the rules concerning real estate investments are strict with IRA accounts.

Types of IRA Accounts for the Self-Employed

Are you self-employed? Look into SEP IRAs. These are for self-employed professionals, independent contractors, small business owners, freelancers, etc. SEP, or Simplified Employee Pension, adheres to similar tax rules for withdrawals as traditional IRAs. As of 2020, SEP IRA contributions have a limit of either $57,000 or 25% of compensation, whichever is less. In 2021, the limit may go up to $58,000.

The self-employed and small business owners have a SIMPLE IRA option as well. This plan is a “savings incentives match plan for employees” and follows similar tax rules for withdrawals as traditional IRAs. With the SIMPLE IRA account, employees are allowed to make contributions. The employer should make them as well, and all contributions are tax-deductible.

As mentioned above, you can have more of a say in how you spend your IRA money and which investments you would like to make with self-directed types of IRA accounts. It can be a straightforward process, and there are learning tools available. Rocket Dollar allows you to have as much control as you would like.

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