Individual Retirement Accounts (IRAs)

Types of individual retirement accounts, who they are available to, and common questions about utilizing IRAs within a retirement planning strategy.

Workplace retirement accounts (like 401(k)s and 403(b)s) are often most people’s first priority when it comes to long-term saving and retirement planning, but individual retirement accounts, or IRAs, can also play an important role when planning for retirement. On this page, you’ll find a definition of each type of IRA as well as some answers to common questions that people have about them.

→ Jump to: Commonly Asked Questions about Individual Retirement Accounts

What is an IRA?

An individual retirement account is an investment vehicle that allows you to save for the long term. Investment options for IRAs include stocks, bonds, money market funds, and more.

What kinds of individual retirement accounts are available to me?

There are a few different IRAs that you might choose to open depending on your employment, income level, and long-term investment plan, among other factors (or that you might inherit). Below, you’ll find quick definitions of each:

Traditional IRA

A Traditional IRA is an investment account that you can use to save for retirement by making tax-deferred contributions within the yearly limits referenced above. Though you will have to pay taxes on any withdrawals you make from your IRA in retirement, in the years that you make contributions, you may benefit from a lower tax bill.

Roth IRA

Roth IRAs are similar to Traditional IRAs in that they are subject to the same yearly contribution limits and open to the same kinds of investments. However, you must pay taxes on any money that you contribute to the account. Then, in retirement, you can withdraw the funds tax-free assuming all contribution/deductibility requirements are met.

Rollover IRA

Most often, Rollover IRAs consist of employer-sponsored retirement plans like 401(k)s, 403(b)s, and Thrift Savings Plans that have been rolled over into Traditional and Roth IRAs. It is also possible to roll SEP and SIMPLE IRAs into a Traditional IRA if you would like to consolidate your retirement savings. If you are curious about how to complete any of these rollovers, feel free to reach out to a One Day In July financial advisor.¹

SEP IRA

A Simplified Employee Pension IRA, or SEP IRA, is like a Traditional IRA, but the account is set up by the employer on behalf of the employee. (Self-employed individuals can also set up a SEP IRA for themselves in many cases.) Employees cannot contribute to SEP plans – only employers can. For more information, click here.

A Savings Incentive Match Plan for Employees IRA, or SIMPLE IRA, is similar to a SEP IRA in that it is also like a Traditional IRA that has been set up by the employer for the employee. SIMPLE plans are meant to provide small business owners who are not currently offering their employees a sponsored retirement plan a way to help their workers save for retirement. Thus, in this case, employees can contribute to their accounts. (Self-employed individuals can also utilize SIMPLE IRAs if desired.) More information about SIMPLE IRAs can be found here, and a comparison of Self-Employment Retirement Plan options can be found here.

Inherited IRA

Inherited IRAs are generally Traditional or Roth IRAs that have been handed down to an individual from a family member or loved one that has passed away. There are a number of strict rules and regulations regarding inherited IRAs, including ones that dictate what kinds of accounts must be opened, and how RMDs must be processed. This article can help you begin to digest the guidelines surrounding inherited retirement accounts, and, as always, feel free to reach out to a One Day In July financial advisor if you have more questions.

Common questions about individual retirement accounts:

• What are the IRA contribution limits?

  • Traditional and Roth IRAs: There is an overall contribution limit for both Traditional and Roth IRAs, and it is updated yearly. The limit also changes slightly depending on whether you have reached the age of 50. In both cases, for your Traditional IRA, it’s important to double check how much of your contribution is deductible, which largely hinges on your income level and whether you are already participating in an employer-sponsored retirement plan. See more details about IRA deduction limits here. For your Roth IRA, make sure to pay attention to modified adjusted growth income (MAGI) requirements. You must be below certain thresholds in order to contribute the maximum amount to your account.
  • SIMPLE IRAs: SIMPLE contributions consist of both salary reduction contributions from the employee and employer contributions (either matching or nonelective). The exact limits for employees are subject to change each year. Also, like with Traditional and Roth IRAs, catch-up contributions are available to those 50 and older.
  • SEP IRAs: The SEP IRA contribution limit is the lesser of either 25% of the employee’s pay or a specified amount that is recalculated yearly. Contributions can be made only by employers, not employees, and catch-up contributions are not allowed.

• Which tax advantages come with contributing to my IRA?

  • Traditional IRAs: Your contributions may be tax-deferred up to specified IRA deduction limits.
  • Roth IRAs: Roth IRAs do not allow for tax-deferred contributions of any kind, but, up to a certain income threshold, any funds that you add to your account while working can be withdrawn in retirement tax-free.
  • SIMPLE and SEP IRAs: Contributions to SIMPLE IRAs may be deductible depending on your employment situation, and the same is true for SEP IRAs.

• Can I contribute to my Traditional and Roth IRAs at the same time as my SIMPLE or SEP IRA?

  • The short answer is yes, though you will want to pay very close attention to the IRS’ most current IRA contribution limits. If you have any questions about your particular situation, your One Day In July financial advisor can help you sort through the details.

• What are required minimum distributions (RMDs) and when do they begin?

  • Required minimum distributions are minimum amounts that must be withdrawn from Traditional, SIMPLE, and SEP IRAs (and other retirement accounts like 401(k)s) each year beginning when you reach age 73. You can, of course, withdraw more if you would like. It should also be noted that Roth IRAs do not require yearly withdrawals at any point.

1. The decision to rollover a workplace retirement plan into a personal IRA account should be considered on a case-by-case basis, as it may not always be the most prudent choice, depending on the specific facts and circumstances of the case.