4 Types of IRAs: Which Is Most Likely to Benefit You?

An individual retirement account (IRA) is a versatile personal savings plan designed to help Americans save for retirement, offering tax benefits along the way. If you've heard about IRAs but never explored their flexibility, now might be a good time to do so. Here, we will delve into four different types of IRAs, empowering you to determine which is most likely to benefit you.

IRAs available outside of an employer's retirement plan

Traditional and Roth IRAs are two types of retirement plans that can be easily opened through a brokerage firm or other financial institution.

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Traditional IRA

As long as you or your spouse have earned income, you can contribute to a traditional IRA. For 2025, the annual contribution limit is $7,000 for individuals up to age 49. If you turn 50 or older during the year, your 2025 limit is boosted to $8,000.

If you want to contribute the full amount, there's only one catch: Your modified adjusted gross income (MAGI) for the year must be at least as much as you contribute. For example, if your sole income is from a part-time job with $5,000 in earnings, $5,000 is the most you can contribute for the year.

IRA contributions are typically made with pre-tax dollars, meaning you may not have to pay taxes on the funds when they're contributed. The ability to deduct contributions is phased out for taxpayers covered by a workplace retirement plan.

Although you may not have to pay taxes on contributions now, federal law requires you to take required minimum distributions (RMDs) when you reach a certain age, and you'll pay taxes on the money at that time. While the current RMD age is 73 for many people, anyone born in 1960 or later can wait until age 75 if they wish.

A traditional IRA generally makes sense if you expect to be in a lower tax bracket when you retire.

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Roth IRA

One sweet benefit associated with Roth IRAs is that contributions are made with after-tax dollars. In other words, you contribute money you've already paid taxes on. Unlike traditional IRAs, there are no RMDs for Roth IRAs, and since you've already paid taxes on the money, you don't have to pay taxes again when you withdraw the funds in retirement.

However, there are income limits that must be met to be eligible for a Roth IRA. What's more, your income determines whether you qualify to take full advantage of a Roth IRA's benefits. Here's a breakdown of basic eligibility requirements:

• Single or head of household: You must have a MAGI of $150,000 or less to contribute the full $7,000 to a Roth IRA (or $8,000 if you're 50 or older). If your MAGI exceeds $150,000 but is less than $165,000, the amount you can contribute is reduced. If it's more than $165,000, you cannot contribute to a Roth IRA at all.
• Married, filing jointly, or qualifying widower: To make a full contribution, your MAGI must be less than $236,000. If your MAGI is more than $236,000 but less than $246,000, the amount you can contribute is reduced. If your MAGI is greater than $246,000, you cannot contribute to a Roth IRA.
• Married filing separately: You can only contribute to a Roth IRA if your MAGI is less than $10,000, and even then, your contribution is reduced.

Roth IRAs make sense for those who are currently in a lower tax bracket than they expect to be during retirement.

IRAs available through employer-sponsored plans

To be eligible for a SEP IRA or SIMPLE IRA, you'll need to either be a business owner or work for an employer that sponsors one of these plans.

SEP IRA

The typical requirements for a simplified employee pension (SEP) IRA include:

• You must be 21 or older.
• You must have worked for the business for at least three of the past five years.
• You must have received at least $750 in compensation in the current year.

Although you cannot generally make contributions from your earnings (unless your plan was adopted prior to 1997), your employer can contribute 25% of your salary to a SEP, up to $70,000. That means if you earn $60,000 annually, your employer can contribute up to $15,000 to the retirement plan ($60,000 x 0.25 = $15,000).

A SEP IRA makes sense for small-business owners who want to contribute up to 25% of their earnings to a retirement plan.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is typically offered by for-profit, nonprofit, and government organizations with fewer than 100 employees. Like a SEP IRA, an employer can choose to have less restrictive eligibility requirements. However, here's how standard requirements shake out:

• You must have earned at least $5,000 in any two previous years of employment.
• You must anticipate earning at least $5,000 in your current year of employment.

Contribution limits are higher for a SIMPLE IRA than for either a traditional or Roth IRA. For example:

• Under age 50: You can contribute up to $16,500 annually.
• Age 50 or older: You can contribute $20,000 (including catch-up).
• Age 60 to 63: You can contribute $21,750 (including catch-up).

If your employer has 25 or fewer employees and makes specific employer contributions, you can contribute 110% of the regular catch-up limit. Let's say you're 30 years old and contribute $16,500 for the year. You may be able to contribute $18,150 (100% of the standard contribution, plus an additional 10%).

With a SIMPLE IRA, your employer will typically make either a 3% match or a 2% nonelective contribution on your behalf. Here's the difference between the two:

• With a match, an employer matches up to a certain percentage of the amount you contribute. For example, if you contribute 10% of your salary annually, and your employer matches 3%, your total contributions for the year equal 13% of your earnings.
• With a nonelective contribution, the employer contributes to your retirement account, regardless of whether you contribute.

Due to the ease of administering a SIMPLE IRA, it may be an excellent fit for small-business owners and self-employed individuals with a small workforce.

IRAs have a lot going for them, including how easy they are to open and manage. It's just a matter of finding the type that suits your situation.

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