Types of IRAs
Traditional IRA
Also known as a contributory IRA, this is an IRA account funded with your
earnings. Depending on your income, you may be able to deduct some or all of
the contribution you make to your traditional IRA. There is a limit on contributions
which changes annually. For 2008, the maximum contribution is $5,000 (people
age 50 and older can contribute and extra $1,000, woohoo)!
Note that the State tax IRA differently--some have rules that mimic the federal
rules while other states wont allow you to deduct any of your IRA contributions
(but of course, you pay no State income tax when you withdraw funds later).
Rollover IRA
The term rollover IRA usually means funds that were transferred from a company
plan such as a 401k, profit sharing or pension plan.
Roth IRA
Similar to a traditional IRA, a Roth account is funded with your after tax
earnings However, no part of your Roth contributions are deductible but all
withdrawals form your Roth are tax free. For most every worker, funding a Roth
IRA is far superior than a traditional IRA.
For 2008, contributions up to $5,000 are allowed ($10,000 for couples), subject
to phaseout between adjusted gross income of $101,000 and $116,000 for singles
($159,000 and $169,000 for joint filers). Note that for self employed, you
may have a self employed retirement plan yet the same thresholds apply even
if you have a SEP, 401(k) or Keogh plan (and even if your spouse is covered
by a retirement plan through work of self-employment). So you can contribute
the max to your SEP, 401(k) or Keogh anan additional $5,000 (or $10,000) into
a Roth IRA. You may contribute an additional $1,000 as a "catch up" if
you will be 50 or older at year end. So can your spouse if he or she passes
the age test.
SEP IRA
The SEP IRA is for self employed individuals and small business owners and
the contribution limits are much higher than traditional or Roth IRAs. In 2008
a SEP IRA has a contribution limit of $46,000. Contributions to a SEP IRA are
generally 100% tax deductible and investment earnings in a SEP IRA grow taxed
deferred.
A SEP IRA has broad appeal due to its high annual contribution limits, completely
discretionary and flexible annual contributions and minimal administration.
SEP IRA plans can be established by a one person business or by a business
owner with employees.
- Most frequently a SEP IRA is established by a business owner without employees
and is discussed in detail below.
- In special situations a SEP IRA may be an ideal retirement plan for a business
owner with employees.
Additional IRA topics
IRA Distribution
IRA Rollover
IRA Taxes
Self Employed Retirement
Plans
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