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Understanding Individual Retirement Arrangements

September 21, 2018

 

Individual Retirement Arrangements, or IRA are accounts into which you can deposit money to provide financial security when you retire. You can set up an IRA with a:

  • bank or other financial institution

  • life insurance company

  • mutual fund

  • stockbroker 

Here are some tips and definitions regarding different IRA’s:

 

Traditional IRA: Contributions to a traditional IRA may be tax-deductible (depends on your Modified Adjusted Gross Income and if you are covered by a retirement plan at work or not). The amounts in a traditional IRA are not generally taxed until you take them out of the account. Annual contribution limit is usually $5,500/year plus $1,000 catch up contribution if you are over 55 years old.

 

Savings Incentive Match Plan for Employees: commonly known as a SIMPLE IRA. It allows employees and employers to contribute to traditional IRAs set up for employees. It is ideal as a start-up retirement savings plan for small employers. Employees usually can make salary deferrals contributions up to $12,500/year, plus $3,000 catch up if you are over 50 years old. Funds in the account also are not taxed until you take them out.

 

Simplified Employee Pension: Better known simply as an SEP-IRA, it is a written plan that allows an employer to make contributions toward their own retirement and their employees' retirement without getting involved in a more complex qualified plan. An SEP is owned and controlled by the employee. In this type of IRA, only the employer contributes to the SEP-IRA for employer and employee portions. The limit of contributions is $55,000/year or 25% of employee’s compensation.