Approaching 50 years of existence, Individual Retirement Accounts or Arrangements (IRAs) were born from the Employee Retirement Income Security Act (ERISA) of 1974. IRAs were designed to make it easier for individuals without access to employer-sponsored retirement plans or pensions to save in a tax-advantaged manner. Additionally, these plans were designed to function as a complement to employer-sponsored options, a means of preserving and “rolling over” assets as employees changed “buses,” move on to other workplaces, and as they entered into their golden years of retirement.
The “traditional” IRA may be the grandaddy of them all, but the Roth IRA has been around since the late 1990s. It was established to provide another option for individuals to build their nest eggs. While the traditional option allows for deductions to be claimed on contributions, taxes are owed when the IRA-holder makes withdrawals from the account. Roth IRAs could be described as boasting a “trifecta” (and then some) of tax advantages; these benefits include the perks of not being taxed on any earnings or withdrawals (nor are beneficiaries subject to tax on withdrawals). Additionally, you may be eligible for a “Saver’s credit” (Retirement Savings Contributions Credit), and the original owners of Roth IRA accounts are not subject to required minimum distributions.
Together, these accounts have really dominated the IRA market, and are likely the options that first come to mind when most readers think of these plans. However, there are other types of IRAs. And just because you may not be aware of them, does not mean their advantages are inferior to the reigning king and queen of Individual Retirement Accounts. In fact, these lesser-known alternatives may be better-suited to your situation, depending on factors such as your earnings, employment status, and other offerings that may be available through your workplace. Your friends at O’Donnell, Ficenec, Wills & Ferdig are happy to shove some of these arrangements out of the shadows and into your consciousness. So, you can cushion the blow from tax liabilities, and can grow your monies in the most favorable way possible no matter the time horizon.
Simplified Employee Pension IRA
The SEP is a “twist” on the traditional IRA. Set up by and with contributions from employers, those funds are directed toward each employee in their respective IRAs. Employers, for their part, enjoy tax benefits while account-holders enjoy tax-free earnings growth. Additionally, you can make greater contributions to SEP IRA plans than what is allowed with other “tax-favored” accounts for retirement savings. While employer contributions can vary based on cash flow fluctuations from year to year, up to 25% of each associate’s earnings can be contributed into their unique account. Sole proprietors, too, can establish SEPs, which are hassle-free to set up and manage. In retirement, distributions on these pension IRAs are taxed. This may be an affordable option for entrepreneurs with smaller ventures who desire to amplify their nest eggs, while acquiring deductions made for employee contributions, and avoiding the potentially prohibitive costs of starting and cultivating some retirement plans.
“SIMPLE” (formerly, “SARSEPs”)
The Salary Reduction SEP (SARSEP) was formerly an attractive benefit for employees at smaller businesses before the prevalence of workplace 401 (k) plans. SARSEPs made way for a new plan, the Savings Incentive Match Plan for Employees, in 1996 (following the passage of the Small Business Job Protection Act). Given its history, the SIMPLE plan is not surprisingly akin to 401 (k)s. It can be an ideal option for both smaller-sized firms as well as for those who are self-employed. It differs from the foundational “SEP” in that associates are able to funnel their monies toward the account by using salary deferrals. In fact, some plan owners have the freedom to choose from an array of banks and financial institutions as their “home” for these accounts.
Unlike the SEP, account-holders can make “catch-up” contributions. Those aged 50 and older may sock away an extra $3,000 in savings. SIMPLE also shares some tax advantages with traditional IRAs, and the monies can even be rolled into traditional IRAs after certain requirements have been met. Again, smaller companies with fewer than 100 employees are really the sweet spot for this IRA. Those who are self-employed may be better-served by SEPs, because the limits on contributions are lower with SIMPLE plans. So, you may be able to accelerate the growth in those funds with a vehicle like the Savings Incentive Match Plan.
IRAs can be heavily nuanced or “borrow” from both traditional and newer IRA plans. For instance, Payroll Deduction IRAs start with a foundation of traditional or Roth IRAs. Once these are set up, payroll deductions may be authorized in specified amounts and as per requirements. This set-up is available to most any sized business, as well as for those who are self-employed. The IRS characterizes such a program as “no fuss, no muss.”
Additionally, some married couples may gravitate toward (and be eligible for) Spousal IRAs. These IRAs are appropriate for individuals with only one earner, or those couples in which one spouse has a very low income. Via this arrangement, couples with joint tax returns can contribute to their own separate IRAs of the traditional or Roth variety. Contributions max out at the same level as traditional and Roth accounts, too.
Individuals and their spouses whose income exceeds certain stipulated requirements can still add funds into their traditional IRAs, they just cannot deduct the contributions. So, if you qualify for such a non-deductible IRA, account owners still enjoy tax benefits when growing their earnings. Due to the nature of this arrangement, it can be an attractive option for those who are not eligible for Roth IRAs or deductible IRAs.
Self-directed IRAs provide yet another potential opportunity for savings. It is the savings vehicles (or types of investments) that go into the account, which distinguish this alternative from other IRAs and retirement plans. With other arrangements, investments span the “typical” – stocks, mutual funds and their ilk. With this type of IRA, investments such as real estate and gold are fair game. It is appropriate for individuals who have some investment savvy. It is imperative to understand how these accounts work, and to avoid the risks associated with them (not limited to fraud, excessive fees, volatility).
As your partners in all things financial, the team at OFWF is well-equipped and standing by to answer any questions about IRA options for yourself, or in conjunction with efforts to enrich your employee benefits packages for associates. With our expertise and experience, we can help you avoid any potential pitfalls and make the most of tax-advantaged plans. Do not let opportunities associated with these programs sit on a shelf and collect dust!