Individual Retirement Account - IRA

The first type of IRA is the traditional IRA. The annual contribution limit is $6,000 (or $7,000 for those 50 and older). There is a tax deductibility of contributions depending on income. If your income is too high to qualify for a deductible contribution, you can still make non-deductible contributions. Deductible contributions are when you put a certain amount of your income into the retirement account and the tax on that money is deducted. You can convert a Traditional IRA to a Roth IRA, paying taxes on the converted amount. To enjoy tax-free withdrawals, the Roth IRA must be held for at least five years, and withdrawals occur after age 59½, due to disability, or for a first-time home purchase. Next is the SEP IRA. SEP stands for Simplified Employee Pension. Employers can contribute up to 25% of an employee's compensation or $61,000. Finally is the simple IRA. Employees can contribute up to $14,000 with a catch-up contribution of $3,000 for those 50 and older. Employers can match employee contributions dollar for dollar up to 3% of the employee's compensation. Early withdrawals within the first two years of participation may incur a 25% penalty instead of the standard 10%.