There's no such thing as a one-size-fits-all retirement account. Different types of accounts, and different investment strategies, are available to meet your needs. But it can be confusing, with "Traditional IRA’s", "ROTH IRA’s", "SEP IRA’s", "SIMPLE IRA's", "Solo/Individual 401K’s", and "Company 401K’s". It can make your head spin trying to make a decision. So let’s make it easy!
What’s the difference? And which one is right for you?
While it's true that all IRAs have certain features in common, there can be big differences from one type of IRA to the next. Let’s explain…
IRA (Traditional) - Contrary to what many people believe, IRAs come in several varieties. First there's the traditional IRA, which lets you save up to $5,500 a year (or $6,500 if you're aged 50 or older) from pre-tax income (meaning you can deduct the contributions from your taxable income and thus not pay taxes this year on the amount you invest in your IRA, you will pay taxes on it later when you retire). Your withdrawals, however, will be taxed as income during your retirement, which can be a negative if your account has earned a lot of money over the years. Also, you can’t withdraw any funds until you’re 59 ½ and must start taking distributions when you turn 70 ½.
Roth IRA – These have the same annual limits as traditional IRAs but the tax break is different; while your initial contributions are not deductible from current income, your principal withdrawals will be tax-free, which can be significant for retirement cash-flow planning if you’ve built a nice nest egg over the years. And unlike a standard IRA, with a Roth you can withdraw funds (principal amounts, not earnings) anytime, and you don’t have to start taking withdrawals at age 70 ½ if you don’t want to.
The caveat with Roth’s is that if you earn more than $133,000 a year (or $196,000 if filing jointly) then you aren’t eligible (we’ll give you another alternative in just a moment, the “Solo 401K”).
SEP IRA - If you own a small business or are self-employed, the SEP IRA could be a great option for you and your employees. This "Simplified Employee Pension" is essentially a profit-sharing plan for businesses with any number of employees, be that just 1 or 100. In this plan your company, not you, make the contributions into the employee’s Traditional IRA, which will need to be established. Contributions are based either on the employee’s salary or the net-income of the business. The annual cap is much higher than a traditional or Roth IRA, up to $54,000 per year in pre-tax income (no “after-tax” option on a SEP). Note that all employees must be treated equally and given this benefit, as a % of their salary (e.g. you are putting 10% of your salary into your SEP IRA, then you must also contribute 10% of every employee’s individual salaries to their SEP IRA’s). SEP plans are easy to maintain, unlike qualified retirement plans, SEP plans do not require any complex reporting. You simply deduct the SEP plan contributions on your tax return and notify employees of the contributions. Whether or not the employer makes a contribution that year, the employee is still eligible to make their own contribution as they normally would in their Traditional IRA account.
SIMPLE IRA – If you own a small business (up to 100 employees) or are self-employed and do not offer another type of retirement plan then a SIMPLE IRA plan can be a great option. The “Savings Incentive Match Plan for Employees” allows employees to contribute pre-taxed income into their IRA account up to $12,500 per year, an extra $3,000 catch-up contribution is allowed if you are over 50 years old. However, unlike the SEP, employers are required to make contributions into employee accounts each year. Employers can either make a matching contribution not to exceed 3% of the employee’s compensation, up to $12,500 or $15,500 if older than 50, or a 2% non-elective contribution based off of each employee’s compensation (income limited to $265,000) resulting in a maximum employer contribution of $5,300. A SIMPLE IRA account must be held for at least 2 years before the assets can be rolled over or transferred to a different account. Other distribution rules are similar to a Traditional IRA except that if you withdraw funds before the age of 59 ½ you will be faced with a 25% penalty.
Solo (Individual) 401K – If you own a small business or are self-employed, the Solo 401K could work nicely for you. This essentially combines the best parts of a ROTH and a SEP and is for people who have a business but no employees (other than perhaps a spouse), and will never have any employees. As a “self-directed” plan you can contribute either pre-tax or (Roth) after-tax money into this account, up to $53,000 per year.
Company 401K – Your company can provide employees with a great benefit, the 401K. This plan allows up to $18,000 per year in either pre-tax or after-tax (Roth) contributions to an employee’s retirement account; which can come from the employee solely, or as some sort of “matched funds” or other company profit-sharing participation. Another bonus is that federal law prohibits creditors from touching 401K accounts, an asset-protection benefit over IRA’s. And if an employee parts ways with the company, their 401K can be rolled over (transferred out) into either an IRA or into a new employers 401K.
“self-directed” vs “professionally managed”
Okay, you’ve finally gone through the process of figuring out which type of IRA is right for you. Whew. Now it’s time to get to work and grow the account. Here are the steps…
Funding: Okay, obviously you need to put money into your account. You can do this with a deposit right now. You can also fund it from another retirement account you have set up somewhere, either as: a "rollover" meaning you have taken a distribution from your account and you will reinvest those funds into your new account (this should be done within 60 days of taking the distribution to avoid taxes and/or penalties. Also, you are limited to one rollover per 12 months.) or a "transfer" meaning your current custodian will transfer the funds to your new account so you won’t have to take possession of them (this is favorable because you won’t have to worry about the restrictions and hassle that comes along with a rollover). And, of course, you should arrange for some amount of money to be automatically added to your IRA every month (something we make easy).
Investing: Self-Directed - If you’ve got some investment expertise and time (not to be underestimated), then you can certainly make all the investment decisions yourself. You pick stocks, bonds, and whatever else you want for your account that are available via platforms who have integrated into our technology and systems. The gains, as well as the losses, are completely up to you to handle.
Investing: Prime Managed - "Prime" accounts provide you with professional management. You choose the funds, and our Trust Officers manage those assets and make the investment decisions based upon the stated strategies and investment policy in order to protect your assets while growing the value of your IRA. Our targeted strategies you can choose from include: