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 is key, as it may impact what you’re able to accomplish with the money you earn from investing. Whether it’s for retirement or profit, here’s what you need to know.
Individual Retirement Accounts (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 $5,500 or $6,500, depending on your age. These are good for people that would have set aside money for their retirement anyways, as you’ll stave off paying taxes on the money in your IRA until it’s withdrawn. At that time, it will be subject to that year’s taxes.
The biggest difference between a traditional IRA and a Roth IRA is when you pay taxes on the money contributed. Whereas you don’t pay taxes that year on the money you set aside in a traditional IRA, the money you contribute to a Roth IRA has already been taxed. This is important when you start withdrawing once you’re eligible, as money taken out of a Roth IRA will not be taxed the year you withdraw it.
Employer Sponsored Accounts
A Simplified Employee Pension (SEP) IRA can be offered by employers, but there is also a self-employed version of SEP IRAs. Those who work full time self-employed or part-time self-employed can take advantage of this. 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 $53,000 a year.
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.
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 age of retirement, as determined by the U.S. government.