Retirement Options

With so many things to worry about while deciding a proper plan for your retirement, it is likely that you might get confused by the innumerable plans available in the market. An ordinary layman can hardly differentiate between an IRA and Roth IRA. So before making a choice from the different available options, you need to have a very clear idea about each plan, how to fund it and take out distributions from it. Before venturing out into the details of each plan, it is necessary to get acquainted with the different plans.

1) Traditional IRA’s
2) Roth IRA’s
3) SEP IRA’s
4) SIMPLE IRA’s
5) Qualified Plans
6) 403(b) Accounts
7) 529 Plans
8) Education Savings Account

Let us discuss a few of these:

Traditional IRA

The Traditional IRA is an excellent way to supplement the retirement income of an individual. Contributions to the traditional IRA’s are flexible and tax deductible. The earnings grow on a tax-deferred basis allowing the individuals to choose the time for funding it. Some of its features are:

Individuals whose compensation are taxable during the year and will not be 70.5years by the end of that year can establish and fund a traditional IRA.

Institutions having IRS approval such as banks, brokerages, and savings institutions can have Traditional IRA’s established with them.

The sources of Contribution can be from own contribution, spousal contributions, transfers or rollovers.

Participant contributions in IRA must be made in cash and not in the form of securities.

Investment from IRA’s cannot be made in tangible personal properties, alcoholic beverages, and collectibles that include artworks, drugs, antiques, metals, gems, stamps, coins etc.

Determination of tax and penalty treatment applicable to distributions is dependant on the owner’s age at the time of withdrawal and tax-deductibility treatment of the assets during contribution.

Roth IRA

The Roth IRA probably has the maximum potential. It can provide an excellent support to an individual’s retirement. The earnings from the Roth IRA accrue on tax free basis, while the earnings from the Traditional IRA accrue to a tax-deferred basis. Roth IRA’s are characterized by tax free qualified distributions, and contributions are never tax deductible. Individuals who are self employed and have a taxable compensation can establish a Roth IRA fund. Like Traditional IRA, Roth IRA is also flexible, and is very popular among the different retirement saving plans. The features of Roth IRA are:

Any person paying an income tax may establish and fund a Roth IRA.

The amounts arising out of rental income, interest and dividends are excluded from Roth IRA contributions.

Sources of funding for Roth IRA can be from own contributions, spousal contributions, transfers and rollovers.

Any institution, be it a bank, brokerage, or other financial institution receiving IRS approval to offer IRA’s can get Roth IRA established with it.

All participants IRA contributions should be made in cash and not in the form of securities.

IRA can invest in U.S gold coins, silver coins and certain other precious metals, but not in collectibles.

From Roth IRAs, qualified distributions are tax and penalty free; but distributions that are non-qualified get subjected to tax and early-distribution penalty.

Qualified distributions from Roth IRAs are tax and penalty free, but non-qualified distributions may be subjected to tax and early-distribution penalty.

SEP IRA

SEP or Simplified Employee Pension Plan is a plan for retirement that are established by self–employed individuals and employers. It is an IRA based plans to which employers make tax deductible contributions on behalf of employees who are eligible. Under this scheme the employer receives a tax deduction for contributions in the plan on a discretionary basis made to each SEP IRA. The features of this plan are:

The employee must be at least 21 years, have a minimum earning of $500 per year, must have worked three out of previous five years to be eligible to participate in the SEP.

An employer having more than one employee is eligible to establish a SEP plan. This might include sole proprietorship, partnership, corporations, and non-profit organizations.

The same account may be used by employees where their regular IRA contributions are made.

The vested contributions to SEP IRA’s is 100%. This means regardless of whether the employee still works for the employer, the employees may take the contributions at any time.

The distribution rules of a traditional IRA also apply to SEP assets, as the funding vehicle for a SEP is a Traditional IRA.

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Read More About Retirement Options

What Is a 401(k) Plan?

SIMPLE IRA and SEP Plans

Retirement Accounts

Retirement Options