Ready to start saving for retirement? Learn how to choose the IRA that’s right for you.
Q: How do I choose the Individual Retirement Account (IRA) that’s right for me? What do I need to know about recent changes made to these accounts?
A: There are important distinctions between each type of IRA. There have also been several changes made to the structure of IRAs with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020.This guide can help you choose the retirement account that suits your needs.
Traditional IRAs offer tax-free contributions, which may also be tax-deductible. Investment earnings aren’t taxed, and there are no income limits for contributors; however, all withdrawals made during retirement will be taxed.
Roth IRAs feature taxed contributions and growth with tax-free withdrawals at retirement as long as they are age 59 1/2 or older and have had the account for 5 years or longer. There is no age limit for contributions, though there are income and contribution limits for eligible contributors.
Simplified Employee Pension (SEP) IRAs are workplace retirement funds with contributions made by the employer. Contributions are subject to a cap. Earnings grow tax-free. The annual contribution limits are generous, but subject to fluctuation along with the business’s cash flow. Also, there are no catch-up contributions allowed for workers aged 50 and over.
Up until the passing of the SECURE Act, the limit for SEP IRAs was capped at 25% of an employee’s salary or up to $56,000, whichever is less. That limit has been increased to $57,000.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are workplace retirement accounts that allow both employees and employers to make contributions.
With the passing of the SECURE Act, the contribution limit for SIMPLE IRAs increased from $13,000 to $13,500, with a catch-up limit of $3,000.
SECURE Act changes to retirement accounts
RMD changes: Up until the passing of the SECURE Act, holders of IRAs were not allowed to make contributions and were obligated to begin taking Required Minimum Distributions (RMDs) when they reached age 70 ½. Now, the age for RMDs has increased to 72. Also, IRA holders can now continue making contributions indefinitely, as long as they can demonstrate earned income.
Changes for workplace retirement plans: Part-time employees who work at least 500 hours in three consecutive years and meet the age requirements can now participate in employer retirement plans. This change takes effect in January 2021. Also, small businesses can now team up with other organizations when opening an employer retirement plan.
Changes for inherited IRAs: Non-spousal inheritors of IRAs must now empty the account within 10 years.
CARES Act changes to retirement accounts
Changes for RMDs: The CARES Act waived all RMD requirements for IRAs for the year 2020.
Special allowances for coronavirus-related withdrawals: The CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of qualified coronavirus-related distributions.
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