Why IRAs. Why now.

Because IRA's can be a powerful tool for long-term financial goals.

Growth from interest compounds year-over-year with the taxes deferred. Over an extended period of time, this tax-deferred compounding, can make a significant difference in overall retirement savings.

And, depending on which kind of IRA you choose, you can defer taxes on the money going in now or have tax free withdrawal of the money coming out later if Roth rules are met.

Take a look at the four most common types of IRAs and identify your clients for whom they may work well.

Types of IRAs

For Individuals

Traditional IRA: Pre-Tax Contribution

For clients seeking tax-deferral on contributions and a tax deduction.

The basics

Contributions may be made regardless of income – deductibility may be limited based on AGI
10% IRS tax penalty applies to withdrawals of both contributions and earnings if made prior to age 59 ½, with certain exceptions
Withdrawals are taxed as ordinary income
Required Minimum Distributions (RMDs) must start at age 72

May work well for a client who…

Needs a tax deduction
Wants to save in a tax-deferred vehicle but is okay with paying taxes on withdrawals in retirement
Anticipates their income tax bracket at retirement to be lower than their current bracket
Has maxed out contribution to their employer-sponsored plan, has income below the deductibility limits, and would like to save more
Does not have access to an employer-sponsored retirement plan

Roth IRA: Post-Tax Contribution

For clients seeking tax-free withdrawals in retirement.

The basics

Withdrawals are tax free if Roth has been in place for five years and one of the following

Age 59 ½
Disability
First time home purchase up to $10,000

Client may contribute at any age
Contributions may be made if income limits are not exceeded
There are no Required Minimum Distributions (RMDs)
10% IRS tax penalty applies to withdrawals of earnings only if made prior to age 59 ½, with certain exceptions

May work well for a client who…

Wants tax-free withdrawals at retirement
Anticipates their income tax bracket at retirement to be higher than their current bracket
Has maxed out contribution to their employer-sponsored plan and would like to save more
Does not have access to an employer-sponsored retirement plan

For Small Business Owners

SEP-IRA (Simplified Employee Pension)

For small business owners seeking retirement benefits and a business tax deduction.

The basics

Plan is solely funded by business owner
Contributions are not required every year but must be the same percentage of pay for all employer(s) and employees
Policies are owned by the employees; contributions are immediately vested
Withdrawals are taxed as ordinary income

Distribution prior to 59 ½ subject to 10% IRS Early distribution penalty

May work well for a client who…

Is self employed
Owns a business with few (or no) employees
Wants to attract and retain employees
Needs a significant tax deduction

SIMPLE IRA (Savings Incentive Match Plan for Employees)

For small business owners with less than 100 employees seeking to offer a tax deferred retirement plan and a business tax deduction.

The basics

Plan is funded by employee-elected pre-tax payroll deductions
Business owner is required to contribute flat 2% of each employee’s compensation or match employee contributions dollar for dollar up to 3% of gross pay annually
Policies are owned by the employees; employer contributions are immediately vested
Withdrawals are taxed as ordinary income

Distribution within 2 years of starting the SIMPLE IRA is subject to 25% Early distribution penalty instead of the typical 10%

May work well for a client who…

Owns a business with less than 100 employees
Wants to attract and retain employees
Needs a significant tax deduction
Does not offer any other employer-sponsored retirement plan
Wants employees to be able to contribute to their retirement with less complicated and less expensive plan than most defined contribution plans