IRA Types…So Many Options to Choose From

Question…how many IRA types are there?  We know about some of the most common ones like the traditional IRA or the Roth IRA.  So how many do you think there are?

You might (definitely) be surprised that there are actually 11 different IRA types.  That is crazy, especially since the majority of the population only thought there were two.

We know about IRA’s.  Individual retirement accounts.  We can contribute each year (as long as we make under certain thresholds) and in most cases receive a tax deduction for contributing to these accounts.  While we work and until we are old enough to withdraw from these retirement accounts, we are able to have our profits grow tax-free.

Compounding the interest and gains over many decades and years without paying taxes is an enormous advantage.  When we see charts like this

we see how much our money can grow if we reinvest our profits.  One thing that always is never shown or spoken about when showing these charts is that your profits always are taxed.  They are never factored into these charts.  However, these charts and the equations for compounding interest and gains are very applicable for all IRA types as the money does grow tax-free.

There are many different rules as far as contribution limits, deduction limits, and timing of your taxable event that we will not get into in this article.  However, we would love to introduce you to the 11 IRA types.

The 11 IRA Types

1. Individual Retirement Account.  This account can be either a tradition or a Roth and can be self-managed at an online brokerage or managed as a financial institution.  This IRA type is the most popular and well-known type of IRA.
2. Individual Retirement Annuity.  This is an annuity purchased from an insurance company or a financial institution that is then placed into the individual retirement account.  Remember, an annuity is an insurance contract that pays out dividends to the purchaser over a predetermined timeframe or in one lump sum years in the future.
3. Employer Association Trust Account.  This is an IRA that is bundled together with other IRA’s similar to the way companies have 401k’s for their employees.  Like 401k’s, these IRA types are set up by the employer, however, they are typically set up by unions or other employee associations.
4. Simplified Employee Pension.  This is the IRA known as the SEP IRA.  This is a normal traditional IRA set up by the employer or the company.  This is different than the Employer Association Trust Account and SEP IRA’s are more common for companies rather than groups (unions, etc).  The enormous benefit to having a SEP IRA is that it is truly seen as a pension.  Being such, employees are able to contribute 15% of their compensation up to $30,000 a year to this type of account.  Talk about saving and growing for the future.
5. Savings Incentive Match Plan for Employees Account.  This type of IRA is set up by the employer as well.  The difference here is that it closely mimics a 401k where the employer matches a certain percentage of the contributions made by the employee.  However, the combined contribution from the employee and the match from the employer cannot be greater than $15,000 per year.  This is something that is fantastic to have on top of a 401k as having both accounts would allow for double matching from the employer.
6. Spousal IRA.  This is either a Roth or a normal IRA that allows one who has a spouse that does not work to have an individual retirement account.  For those with spouses who do not work, the Spousal IRA allows for $2500 in contributions in the name of the spouse each year.
7. Rollover IRA.  This is a funky one.  Let’s say someone has a Roth IRA.  When they begin withdrawing from that account at 59 and a half, they may take those withdrawals from that Roth account and put them directly into a rollover IRA.  Whereas in this Roth IRA, contributions are limited to $5500 a year, those contributions into the new rollover IRA are not limited.
8. Inherited IRA.  This is an account that is inherited by someone who is the beneficiary of a deceased IRA owner.  This type of account plays well with the rollover IRA as it is almost like making a second IRA with the new tax advantages and lack of contribution limits from the rollover IRA.  A few rules here to note.  Any new contributions to this inherited IRA are not tax-deductible and withdrawals must begin within a few years of receiving the account by the new beneficiary of the account.
9. Education IRA.  This is an account that is set up with the purpose of providing college funds and tuition for higher education.  Contributions to this account are not deductible at all, however, withdrawals from the account are not taxed at all if they are used for higher education purposed.  This is very similar to a Roth IRA but is typically an account created for children by parents.  This is great because higher education funds will be able to grow tax-free once this account is created.
10. Traditional IRA.  This your standard IRA account.  One can contribute $5500 a year to the account which is tax-deductible, the money gets to grow tax-free, and at age 59 and a half, the money will be able to be withdrawn but taxed at that time.  Again, the benefits are that they money grows tax-free and the likelihood of the owner of the account having a lower tax bracket in their 60’s when compared to their 30’s is high.
11. Roth IRA.  The most popular kind of IRA.  Money goes in untaxed, grows tax-free, then is withdrawn tax-free.

Did You Think There Were That Many IRA Types?

There you have it, folks.  The 11 IRA types.  That is a lot.  Hopefully, you learned a thing or two here.  We are sure you have.

The ability to grow money over decades and years tax-free is a huge edge in investing.  For this reason and the tax deductions associated with contributions and withdrawals in most IRA types, we suggest loading the boat if you will and maximizing as many of these IRA types as you possibly can within reason.