The IRA and Roth IRA

Answer 1

An IRA, or Individual Retirement Account, is basically a savings account that provides tax breaks for retirement. Many people mistake the IRA for an investment, but it is just a way of keeping stocks, mutual funds, bonds, and other types of assets.

IRAs are different from 401(k)s, in that the most common IRAs are ones that are opened by individuals, rather than companies. Other types are opened by individuals who are self-employed and owners of small businesses. Several types of IRAs are available, including the traditional IRA, SEP IRAs, Simple IRAs, and Roth IRAs.

Not everyone is eligible for a given IRA because there are limitations. Each individual IRA has certain eligibility restrictions based upon different things like employment status or income. All IRAs have caps limiting the amount of money you can withdraw tax-free before your retirement.

Roth IRA

The Roth IRA is a retirement account for individuals offering a future tax break- tax-free income for retirement. When following the Roth rules, distributions are tax-free. Contributions can be withdrawn tax-free at any time.

There are no mandatory withdrawals under a Roth IRA. No income taxes must be paid by heirs on Roth IRAs that are inherited. They are, however, obligated to take distributions over the course of their lifetimes.

Roth IRA vs. Traditional IRA

The chief difference between the two is that when paying income tax on the money contributed to the plans, you pay your taxes on the back end with a traditional IRA but there are often no taxes on the back end. The Roth IRA is precisely the opposite. Taxes are paid on the front end, but none on the back end.

SEP IRA

The SEP IRA is designed specifically with self-employed individuals and small business owners in mind. Partnerships, S and C corporations, and sole proprietorships also qualify.

The contribution limit is currently $50,000 and contributions are normally fully tax deductible and earnings from investments in a SEP IRA are allowed to grow tax deferred.