Retirement Plans: Types of IRAs

Traditional IRA

Traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.

• Contributions you make to a traditional IRA may be fully or partially deductible, depending on your filing status and income, and
• Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until you take a distribution (withdrawal) from your IRA.

Roth IRA

Roth IRA is a tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax free.

• You cannot deduct contributions to a Roth IRA.
• If you satisfy the requirements, qualified distributions are tax-free.
• You can make contributions to your Roth IRA after you reach age 70 ½.
• You can leave amounts in your Roth IRA as long as you live.
• The account or annuity must be designated as a Roth IRA when it is set up.

SEP IRA – Simplified Employee Pension IRA

A SEP is set up by an employer. Contributions are made by the employer directly to an IRA set up for each employee.

• Any size business, including self-employed individuals, can establish a SEP.
• A SEP can be easily set up by adopting Form 5305-SEP, a SEP prototype, or an individually designed plan document.
• If Form 5305-SEP is used, the business cannot have any other retirement plan (except another SEP).
• There is no filing requirement for the employer.
• Easy to set up and operate.
• Low administrative costs.

SIMPLE IRA – Saving Incentive Match Plan for Employees IRA

A SIMPLE IRA plan is set up by an employer. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions, and the employer makes matching or nonelective contributions.

• A SIMPLE IRA plan allows both employees and employers to contribute to traditional IRAs set up for employees.
• It is ideally suited as a start-up retirement savings plan for small employers who are not currently sponsoring a retirement plan.
• Available to any small business with generally 100 or fewer employees.
• Employers cannot have any other retirement plan if they choose to establish a SIMPLE IRA plan.
• SIMPLE IRA plans have lower start-up and operating costs compared to conventional retirement plans.
• Employers can provide a significant source of income at retirement for employees.
• Employees have ownership of their SIMPLE IRA accounts and can choose investment options.

SARSEP – Salary Reduction Simplified Emplyee Pension Plan

A SARSEP is a type of SEP set up by an employer before 1997 that includes a salary reduction arrangement.

• Was established before 1997.
• Permits employee salary reduction contributions.
• Meets the following participation requirements annually based on all eligible employees (even those hired after 1996):
  • At least 50% of eligible employees must choose to make employee salary reduction contributions for the year.
  • Had no more than 25 employees who were eligible to participate at any time during the preceding year.
• May need to be amended for current law changes.