What Are the Best Types of IRAs?
- The traditional IRA is the most basic form of individual retirement account and is one of the most effective. With this type of account, you can contribute money on your own every year. As of April 2011, you can put in up to $5,000 per year or $6,000 once you hit 50. The money that you contribute is on a tax-deferred basis. The investment returns in the account are not taxed, and you only pay taxes on withdrawals once you retire. These accounts provide you with flexibility because of the vast amount of options that you have to invest in.
- Another IRA that you may be interested in is the education IRA or Coverdell Education Savings Account. With an education IRA, you can set aside money to help pay for the educational expenses of a loved one. You do not get to deduct the amount of your contribution to this kind of IRA, but you do not have to pay taxes on the earnings in the account. When you withdraw the money from the account, you can use it to pay for education expenses like tuition and fees.
- Another retirement account that you may be interested in is the Roth IRA. With a Roth IRA, you are subject to the same contribution limits as the traditional IRA. With a Roth IRA, however, the money that you contribute is contributed on an after-tax basis. Once you put the money in the account and invest it, you never have to worry about paying taxes on the money again. Even the earnings that you bring in from investments are never taxed in the future.
- The simplified employee pension individual retirement account (SEP-IRA) is another IRA that is available. This is a type of IRA that is set up through an employer. With this kind of account, you do not have to contribute any money to it. Instead, your employer contributes all the money for you. The money is then invested into securities, and it earns returns on a tax-deferred basis. You can withdraw the money upon retirement and pay taxes on it at your normal marginal tax rate.