Understanding Investment Accounts

Investment accounts sound simple. It’s an account for investing! However, there are multiple types of investment accounts, each with their own pros and cons. Picking the right kind of account for your retirement is key depending on your financial goals, since each type has different features and restrictions.

Individual Retirement Accounts (IRA)

Traditional IRA

A traditional IRA allows for people investing in their retirement to set aside money that has not yet been taxed. One downside to a traditional IRA is the maximum contribution limit of $6,000 or $7,000 if you’re 50 or older. A traditional IRA gives you a tax deduction now, in exchange for paying taxes when you make withdrawals during retirement.

Roth IRA

The biggest difference between a traditional IRA and a Roth IRA is when you pay taxes on the money. While you don’t pay taxes on your traditional IRA contributions, the money you contribute to a Roth IRA has already been taxed. It’s great in retirement because your withdrawals (including any of the gains made in the market over the years) are completely tax-free.

Employer Sponsored Accounts

SEP IRA

A Simplified Employee Pension (SEP) IRA can be offered by employers, but there is also a self-employed version of SEP IRAs. Those who are self-employed full-time or part-time  can take advantage of this account type. It’s essentially an IRA managed solely by your employer. In the case of self-employment, you are your own employer. It’s not a loophole, as there are specific guidelines and differences if you decide to create a SEP IRA for yourself. The best part of a SEP IRA? It’s not limited to a set amount of money, but rather a percentage: 25% your income. Technically, it does still have a set maximum limit, but it’s currently limited to $61,000 a year.

401K

A 401K is a retirement plan offered by businesses to their employees, as it is an employer-based retirement plan. 401K plans can also be traditional or Roth, just as IRAs can, meaning you can pay the taxes on the money contributed now or later.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is similar to a 401K, but with more control from the employee. It can be beneficial to the employer, as they don’t require as many resources to manage on their end. To the employee, they can be desirable because the employee will always have access to the money within the account, just as they would in a traditional or Roth IRA. However, they will still incur penalties if money is removed before the federally determined age of retirement.