Saving for retirement is essential, but with so many options, finding the right fit can feel overwhelming. Individual Retirement Accounts (IRAs) are powerful tools for growing your wealth with tax benefits, but which type suits your financial goals? In this quick guide, we’ll break down the most popular IRAs—Traditional, Roth, SEP, and Self-Directed IRAs—so you can make an informed decision.
What Is an IRA?
An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help you build wealth for retirement. Unlike regular savings accounts, IRAs let your investments grow with either tax-deferred or tax-free benefits. There are four main types of IRAs:
- Traditional IRA
- Roth IRA
- SEP IRA
- Self-Directed IRA
Each has unique features tailored to different income levels, investment goals, and tax strategies.
1. Traditional IRA: Tax Benefits Now, Pay Later
A Traditional IRA is a popular choice for those looking to lower their taxable income today. Contributions are often tax-deductible, and your investments grow tax-deferred until retirement.
- Key Benefits: Tax-deductible contributions, tax-deferred growth.
- Withdrawals: Taxable as income after age 59½. Early withdrawals may incur penalties.
- Best For: Individuals who expect to be in a lower tax bracket during retirement.
2. Roth IRA: Tax-Free Retirement
With a Roth IRA, you contribute after-tax dollars, but your investments grow tax-free. In retirement, both your contributions and earnings can be withdrawn tax-free, making it a great option for long-term savings.
- Key Benefits: Tax-free withdrawals, no required minimum distributions (RMDs).
- Income Limits: Full contributions allowed for single filers earning under $138,000 and married couples earning under $218,000.
- Best For: Young earners or anyone expecting to be in a higher tax bracket later in life.
3. SEP IRA: A Solution for Self-Employed and Small Business Owners
A Simplified Employee Pension (SEP) IRA is ideal for entrepreneurs and freelancers. It allows significant contributions while keeping administrative costs low.
- Key Benefits: High contribution limits—up to 25% of income or $66,000 (2024).
- Who Contributes: Only employers can contribute.
- Best For: Business owners seeking to provide retirement benefits for themselves and their employees.
4. Self-Directed IRA: Invest Beyond Stocks and Bonds
A Self-Directed IRA (SDIRA) offers the flexibility to diversify into alternative assets like real estate, trust deeds, and even cryptocurrency. It’s perfect for experienced investors seeking more control.
- Key Benefits: Access to alternative investments, tax-deferred or tax-free growth (Roth SDIRA).
- Prohibited Activities: No personal use or self-dealing with assets.
- Best For: Investors looking to expand beyond traditional asset classes.
2024 Contribution Limits
Understanding contribution limits is crucial for maximizing your retirement savings. Here are the caps for 2024:
- Traditional and Roth IRAs: $6,500 ($7,500 if 50+).
- SEP IRA: Up to 25% of income or $66,000.
- Self-Directed IRA: Follows Traditional or Roth limits.
- Which IRA Is Right for You?
Choosing the right IRA depends on your income, tax strategy, and investment preferences. Here’s a quick comparison:
| IRA Type | Best For | Tax Benefit | Investment Options |
|---|---|---|---|
| Traditional IRA | Tax savings today | Tax-deferred growth | Stocks, bonds, mutual funds |
| Roth IRA | Long-term tax-free growth | Tax-free withdrawals | Stocks, bonds, mutual funds |
| SEP IRA | High earners | Tax-deferred growth | Stocks, bonds, mutual funds |
| SDIRA | Diversifiers & experts | Tax-deferred or tax-free | Real estate, trust deeds, crypto, private equity |
Make Your IRA Work for You
At MOR Financial, we help you unlock the full potential of your retirement accounts. Whether it’s investing in trust deeds, mortgage pool funds, or alternative real estate opportunities, we offer tailored solutions to grow your wealth.
Ready to start building your future? Contact us today.
