When it comes to your individual retirement account there are numerous options to choose from. Each of these IRA investment options present slightly different tax implications that need to be carefully considered. Since there are a few options available for most individuals you are free to choose the type of plan the best suits your estimated needs at retirement.
IRA Investment Choices
Perhaps the most widely recognized retirement plan is also the newest; the Roth IRA. The Roth IRA is named after the late Senator William Roth who was so instrumental in helping to get this type of account available to the American public. Contributions made to a Roth IRA are made with after tax dollars. Since these contributions are taxed on the front end an investor is typically not taxed upon withdrawal.
For those investors that prefer to be a little more hands on Self Directed IRAs are also available. These accounts provide the investor with the option of actively managing the account. If you have never assumed primary control over any of your investments you need to carefully consider whether or not you possess the proper amount of knowledge to profit from a self directed IRA.
Before the Roth IRA was introduced most investors made contributions to what is known as a Traditional IRA. Contributions made to a Traditional IRA are tax deductible and reduce an individual’s taxable income in the year of contribution. When an individual retires and begins to withdraw funds from this kind of account he or she will be taxed on any of the appreciation in value as ordinary income. Since it is assumed that your income will be lower at retirement age this is not necessarily a bad thing.
Many investors may also want to consider IRA investment options such as a SEP IRA or a SIMPLE IRA. A SEP IRA is retirement account that is geared towards self employed individuals. Typically this option is implemented by small business owners that want to establish retirement benefits for either their employees or for themselves. To get more information please read IRS Pub 560.
SIMPLE IRAs, also known as Simplified Employee Pension plans, are very similar to the traditional 401(k) plan. In this account both the employee and the employer are free to make contributions. For many people this IRA investment option makes financial sense as the reduced limitations and simplified management makes it less costly to administer.
Tax laws are always changing so it is crucial that you stay up on the latest changes. It is also a great idea to consult with a certified professional before investing in any of these IRA investment options.