Traditional IRAs, ROTH IRAs, SEP-IRAs and SIMPLE-IRAs


Traditional IRAs - The first type of IRA created was the Traditional IRA. Annual contributions to a Traditional IRA may be tax deductible depending on the individuals Modified Adjusted Gross Income (MAGI) and whether or not the individual and his/her spouse are covered by an employer's retirement plan. Furthermore, earnings accumulate on both principal and interest paid and is tax deferred up to the point the individual makes a withdrawal from the IRA. (See Publication 590-A and Publication 590-B for more information.)


Roth IRAs - Roth IRAs were created by the Taxpayer Relief Act of 1997 to offer individuals an alternative retirement vehicle with tax benefits that are different from those of its counterpart, the Traditional IRA. Depending on an individual's Adjusted Gross Income, contributions can be made (even past age 70 ) to a Roth IRA but are considered non-deductible. However, earnings may be withdrawn tax-free and even penalty-free when certain conditions are met. Contributions to a Traditional IRA may be converted to a Roth IRA provided the individual's AGI is not more than the then applicable limit. (See Publication 590-A and Publication 590-B for more information.)


Simplified Employee Pension (SEP-IRA) - The SEP-IRA was created to provide employers with a simplified way to make contributions to their employees' retirement income. SEP rules permit employers to make an annual contributions of up to a specified percentage of the employee's compensation* or a specified dollar amount, whichever is less. In addition, the employee may contribute the smaller of a specified dollar amount or 100% of their compensation to the same SEP-IRA as their personal IRA contribution. If the individual will be 50 by 12-31, he/she may also make an additional catch-up contribution of a specified dollar amount. However, the amount may or may not be deductible if the participant is covered by an employer retirement plan. (See Publication 590-A and Publication 590-B or IRS Publication 560 for more information.) * The maximum compensation for consideration varies depending on the cap specfied for the then current tax year.


Savings Incentive Match Plan for Employees (SIMPLE IRA) - The SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. It was created for businesses having fewer than 100 employees as a simplified and cost effective way for employers and employees to make contributions to provide retirement income. The employee may defer a portion of his/her income to the SIMPLE IRA. The employer has options of a matching contribution. There are specific deadlines and requirements for employers to adopt a SIMPLE IRA plan. (See Publication 590-A and Publication 590-B or IRS Publication 560 for more information.)


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