What IRA is best for me?

If you are considering opening an IRA, you may have a wide choice of IRAs to choose from. Here are the best IRAs to consider for your situation.

3 min read

If you are starting to save for retirement, an Individual Retirement Account is a great retirement vehicle to build up retirement income. An IRA allows you to stash away part of your salary every year and defer paying taxes until you take a distribution in the future. Although a traditional IRA and Roth IRA are the de facto kings of IRAs, there are other types of IRAs that you should consider.

If you are in the same or higher tax bracket than you anticipate to be in retirement, a traditional IRA may be a better option. However, if you expect your income to be higher in the future, you can opt to contribute to a Roth IRA so that you pay taxes now, and take tax-free distributions in retirement. If you are a small business owner, you can choose either a  SEP IRA or SIMPLE IRA to maximize your contributions.

Is a traditional IRA good for me?

A traditional IRA is a good choice if you are in the same or higher tax bracket than you will be in retirement. You can forego paying taxes now, so that your contributions will grow tax-deferred, and pay taxes in retirement.

You can open a traditional IRA if you are self-employed, or if you are a full-time employee with a workplace retirement account such as 401(k). However, the IRS limits traditional IRA contributions to $6000 in 2021. If you are 50 or older, you contribute an additional $1000, which brings the total contributions to $7,000.

One advantage that taxpayers get with a traditional IRA is that contributions may be tax-deductible, hence lowering the taxable income for the year. Taxpayers get a tax break equivalent to the value of their contributions for the year. Also, any earnings generated in the account are not taxed until when money is withdrawn.

However, when you withdraw funds, you will owe income taxes on the money, and a 10% penalty if you are below age 59 ½. 

Is a Roth IRA a good IRA for me?

A Roth IRA is a good option if you anticipate to be in a higher tax bracket in retirement

You pay taxes upfront when making contributions, and this allows the money to grow tax-free. If you earn too much money, you can legally contribute to the IRA through a backdoor IRA.

For 2021, the IRS allows contributions up to $6000, or $7000 if you are above 50. You can also rollover your 401(k) or IRA to a Roth IRA. Typically, there is no limit for Roth IRA rollovers.

Is a SEP IRA a good IRA for me?

A SEP IRA is a good option for small business owners who want to get a tax deduction on retirement contributions while minimizing the cost of setting up a retirement plan.

Only an employer can make contributions to the SEP IRA account, and these contributions must be equal for all employees, based on a percentage of salary. The employer gets a tax break for any contributions it makes to the employee’s SEP IRA.

Unlike a traditional or Roth IRA, an employee cannot contribute to their SEP IRA account. Since business cash flows may vary from year to year, the amount of contributions may also vary each year.

For 2021, the employer can contribute the lower of 25% of employee compensation, or a maximum of $58,000. The employer’s contributions vest immediately.

Is a Spousal IRA a good IRA for me?

If you are a non-working spouse married to someone with earned income, a spousal IRA may be a good option.

Although the IRS requires that taxpayers must have an earned income to open and contribute to an IRA, a spousal IRA is exempted from this rule. However, the couple must have a taxable income and file a joint annual tax return to contribute to a spousal IRA.

A non-working spouse who earns little or no income can have their working spouse contribute to the spousal IRA. If each spouse has an IRA, the working spouse can contribute up to $6000 to each account, bringing the total contributions for both spouses to $12, 000. If both spouses are above 50, they can contribute $7,000 to each IRA, bringing the total contributions to $14,000.

Is a SIMPLE IRA a good IRA for me?

A SIMPLE IRA is a good option for small businesses, usually with less than 100 employees. It is a preferred option for small businesses since it is easy to set up, and is cheap to manage.

Employees can contribute to the retirement account through salary deferrals. However, an employee can be eligible to participate in the SIMPLE IRA if they earned $5000 or more in a two-year period and anticipate earning a similar amount in the current period.

One limitation with SIMPLE IRAs is that it has lower annual contribution limits than a SEP IRA and 401(k) plan. For 2021, the contribution limit is $13,500, and the employer can contribute up to 3% in matching contributions. Employees over 50 can contribute an additional $3,000 to the SIMPLE IRA. 

Is a Self-directed IRA a good IRA for me?

If you are looking to invest in non-conventional investments such as real estate and precious metals, a self-directed IRA is a good option. Usually, a standard IRA allows retirement savers to invest in common investments such as mutual funds, bonds, and stocks.

A self-directed IRA allows investors to invest in alternative assets prohibited in standard IRAs such as real estate, gold, silver, privately-held companies, etc. These investments are only available through specialized firms that provide self-directed IRA custody services. However, although these accounts are opened with a custodian, the account holder manages the account directly.