Types of IRAs

An Individual Retirement Account (IRA) is a savings plan that allows you to defer taxes on the income you earn until retirement age.  In certain instances, the money you contribute to an IRA is tax deductible.  Here is an overview of the different types of IRAs.  Before establishing any type of IRA, we encourage you to consult with your tax advisor to ensure that the type of IRA selected by you is appropriate for your circumstances.

Traditional IRA. Contributions can be tax deductible and earnings grow on a tax-deferred basis.  Individuals with earned income can contribute up to $4,000 for 2006.  Wage earners age 50 and over can also make catch up contributions. Learn more about the Traditional IRA.

Roth IRA. The Roth IRA was created as an alternative to traditional IRAs.  Roth IRA contributions are not tax deductible, although any earnings grow on a tax-deferred basis. You must meet certain income limits to qualify for a Roth IRA. Learn more about the Roth IRA.

Spousal IRA. Spousal IRAs are designed to help non-working spouses save for retirement by investing in traditional or Roth IRAs.  Couples can contribute up to $8,000 to either type of IRA for the 2006 tax year ($10,000 if they are both over the age of 50 before 2007) as long as the total IRA contribution is less than their earned income.

Rollover IRA. A Rollover IRA is a great way for someone who is changing jobs or retiring to continue to receive the same tax advantages as they had with an employer-sponsored plan like a 401(k).  All assets in the plan are simply “rolled over” to an IRA, where any earnings can remain tax-deferred.  In addition, an IRA generally offers more investment options and flexibility than a traditional 401(k).  You can “roll-over” a number of individual IRAs into one Rollover IRA, if you are interested in simplifying your accounts. Learn more about Rollover IRAs

SEP IRA. If your employer sponsors a SEP, or Simplified Employee Pension Plan, you may be eligible for a SEP IRA.  A SEP is a tax-deferred retirement plan that allows the small business employer to make tax deductible contributions to SEP IRA accounts for their employees.  This plan does not allow for employee contributions, unless the plan was established before 1997.

SIMPLE IRA. If you employer sponsors a Savings Incentive Match Plan for Employees, or SIMPLE IRA, you may be eligible to participate.  A SIMPLE IRA is a tax deferred retirement plan available to self-employed individuals or small businesses (those fewer than 100 employees) that have no other retirement plan.  You and your employer can make contributions, however, the plan must be established by the employer.

The two types of IRAs most popular for individual investors are Roth and Traditional. These IRAs have some important differences, especially when it comes to income limits and tax benefits.

In a Roth IRA, you make contributions on an after-tax basis, and any earnings grow free of federal taxes, which means you don't get a tax deduction now, but you won't need to pay taxes on the earnings later. Learn more about Roth IRAs.

A Traditional IRA's key advantage is tax deferral, while possible deductibility means the potential for tax savings today. Any earnings you make may grow tax deferred until retirement. You may be able to deduct your contributions from your current taxes. Learn more about Traditional IRAs.