There are many different types of IRA investment options available, from traditional IRAs to self directed IRA options. This article will examine the differences between two of the most common IRAs: the traditional IRA and the Roth IRA. Other IRA options have different criteria, limits, and benefits, but it is important to remember that all IRA types, including self directed IRAs are governed by the IRS and subject to the same basic regulations.
Traditional IRAs require the account holder or the spouse to have taxable compensation and require that the account holder be younger than aged 70 1/2. There are spousal IRAs, which are available for couples, provided that the holder earns less income than the other spouse, and meets other criteria. Contribution limits vary by employer and or IRA plan type, income, marital status, and other criteria.
Traditional IRAs are the most common types offered in employee retirement plans, and are regulated, as are all IRA types, by the IRS. With this type of IRA, all or part of contributions made be deductible, depending on filing status and income. Earnings are tax deferred until withdrawn, and in most cases, a ten percent early withdrawal penalty applies, unless the distribution is made after the plan holder reaches the age of 59 1/2, death, disability, or certain medical expenses, or first time homebuyer or education expenses occur.
With a Roth IRA, the rules governing the plan are slightly different. Working taxpayers of any age, with modified joint incomes under certain limits, which vary by plan and by marital status, are eligible for this type of IRA. Contributions made are not tax deductible, but earnings accumulate tax deferred, and there are some qualified distribution limits that are free from federal income taxes. Earnings can be withdrawn after five taxable years and once the plan holder has reached the age of 59 1/2 or under circumstances such as disability, and death, homebuyer expenses, higher education expenses, and under other circumstances. It is important to know that higher education expense withdrawals are taxed as ordinary income but are not subject to the ten percent early withdrawal penalty.
These types of IRA investment options are only two of the many available. Do your research and speak with your financial advisor and other trusted resources to determine which IRA options are best for you. Remember, the options provided by your employer are not necessarily the best ones for you. You owe it to yourself, and your financial future to find out which ones are.
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