6 Types of IRAs: Find the Right IRA Type for You

There are different types of IRA accounts. It can be hard to know which one to choose. Don’t worry, we are here to show you the different types of IRAs.

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One thing we can all agree on is that there are many different types of IRA accounts and it can be tough to know which one to choose.

Don’t worry, we are here to show you the different types of retirement accounts and which type of IRA can best benefit your financial and retirement goals. Keep reading to learn which IRA account is best for you and even how to put precious metals into your IRA plan and more.

1. Traditional IRA

The most popular type of IRA is called a traditional IRA account. This type of IRA has many tax advantages. It typically is used as a retirement account. The tax you pay is upfront which is an advantage is taxes go up over time. You will also get a tax write-off when you contribute.

This can help you go into a lower income bracket or simply lower the taxes you pay or increase them at the end of the year. The next benefit is that the investments are not taxed when the money stays in the account. If you can keep the money in the account until you retire the money is then taxed at whatever rate it is currently at. This is perfect for people who want to get below a specific tax bracket.

2. Roth IRA

The next type of IRA is called a Roth IRA. This is a great account for long-term growth. One of the best perks about this account is that any money put in is not taxed. There is no upfront tax as long as you wait until you are retired to take any money out.

Depending on your income will determine if you can put money into a Roth account. You do not get a deduction from your taxes when you contribute to a Roth IRA and that is the downside. This account is great for people who are thinking about long-term growth. They don’t need to worry about what taxes are down the road because they won’t be taxed.

3. SEP IRA

The third type of IRA account is called a SEP IRA. This stands for simplified employee pension. It is a traditional IRA and is great for employees. They will get a tax benefit. The earnings are grown completely tax-free and are given out in amounts once the employee is retired. At that time, people are then taxed.

The amount of annual contribution must be less than 25% of the employee's annual income. These numbers are different if you are self-employed. This is a great option for small businesses. There is no startup cost to this retirement plan, and it helps the employees.

4. Nondeductible IRA

The next type of IRA account is a Nondeductible IRA. When you contribute to this account, it can only be made from after-tax money and is not deductible. With that said, you can still enjoy it being tax-deferred when it grows. This is perfect for people who don’t qualify for a Roth IRA.

5. Spousal IRA

If one of the spouses does not have an income but still wants to have an IRA, a spousal IRA is a great option. It also works if one of the spouses simply has a low income. They can contribute ten to a Roth or traditional however it is under the umbrella of a spousal IRA.

It’s important to note there are some things that need to be done in order to qualify for this. The couple must have a joint tax return. Contributions are also allowed annually of $5500 or under.

This is a great option if one spouse does not work or does not work much and still wants to save for retirement.

6. SIMPLE IRA

The sixth and final IRA we are going to talk about is a SIMPLE IRA. Simple stands for Savings Incentive Match Plan For Employees. This ends up being self-explanatory after you read that. This is like a SEP IRA; however, each employee can contribute through their salary. For example, a certain amount of money can be taken out of each paycheck and they never even see it. It just goes straight into their SIMPLE IRA.

One downside to this is that you are not able to contribute as much. An employer is also typically supposed to give 3% to each employee in their account. Like most IRA accounts, there is a penalty if you take it out early. A SIMPLE IRA is higher than most IRA accounts. It is 25% if you take it out earlier.

This option is great for businesses that have less than 100 employees. If you are self-employed, a SEP option would be better for you than a SIMPLE IRA as you can contribute more.

7. Self-Directed IRAs

Self-directed IRAs, like traditional and Roth IRAs, follow similar rules for eligibility and contributions, but they have one major difference: what you can invest in.

While traditional and Roth IRAs usually only allow investments in stocks, bonds, and mutual funds, self-directed IRAs permit you to own assets such as real estate, gold, privately held companies, and even crypto.

Here are some important points to understand:

  • You need a trustee or custodian who specializes in these less common investments to set up a self-directed IRA.
  • The IRS prohibits holding collectibles and life insurance in the account.
  • Certain actions, like performing maintenance on a rental property owned by the IRA, can result in taxes and penalties because they're considered “self-dealing” transactions by the IRS.

It's essential to be aware of these rules to avoid costly mistakes with your self-directed IRA.

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Find the Right IRA Type for You

As you can see, there are many options for IRA accounts out there. The goal is to choose the one that will most benefit you. Although a traditional IRA account may benefit you now, it may not pay off when you go to use it years from now. In comparison, if you want tax savings now, a traditional option may be perfect for you and allow you to save more money now which can be better for you and your family.

Make sure to write down what you are looking for in an IRA and speak with a professional. Be honest and upfront with them so they can assist you as much as possible. Tell them your salary each year and how much you think you can save. If you know you are not very good with money, tell them that. They can suggest options that take the money right out of your paychecks, so you don’t even see it. You are saving and planning for retirement without even realizing it.

If you have more questions about the best IRA accounts and which one is right for you, let us know.

About the author

Brian Meiggs
Hi, I'm Brian Meiggs! A personal finance expert, entrepreneur, and the founder of My Millennial Guide. My drive is to help others unlock the wealth of freedom and pave the path to financial success. With my bachelor's degree in finance, I help millennials follow the smart money in order to increase their earning potential and start building wealth for the future. I write regularly about side hustles, investing, and general personal finance topics aimed to help anyone earn more, pay off debt, and reach financial freedom. I have been quoted in major publications including Business Insider, Yahoo Finance, NASDAQ, Discover, GoDaddy, BiggerPockets, Fox News, Debt.com, Quick Sprout, Money Geek, MSN Money and many more!