Types of IRAs
If you want an upfront tax deduction today, and you think your income tax rate will be lower when you retire, a Traditional IRA may work for you. Some benefits:
- No contribution restrictions based on income. If you have employment related income you can make contributions up to age 72 regardless of the amount of your income. **The Secure Act made changes to age requirements for 2020 and later taxable years, individuals with earned income can make Traditional IRA contributions at any age, not just for years before reaching age 70½.
- Upfront tax deduction. If you fall below a certain modified adjusted gross income (MAGI), you receive a tax deduction on the money you put in, which may put you in a lower bracket or help you qualify for other tax incentives.
- Maximum contributions. In tax year 2022, the most you can contribute up to $6,000 at age 49 and under; $7,000 if you are age 50 and older*.
- Income tax due on withdrawals. You pay income tax when you take the money out. If you are under 59½, you will have to pay income tax plus a 10% early withdrawal penalty unless you qualify for an IRS exception.
- Withdrawal age requirement. You must start taking minimum withdrawals at age 72. **The CARES Act enabled any RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70½ in 2019 and would have had to take the first RMD by April 1, 2020.
- First-time homebuyer’s exemption. Up to $10,000 can be withdrawn for first-time homebuyer expenses without paying the 10% penalty. However, the money is taxable.
* Age 50 and older before year-end.
With a Roth IRA (Individual Retirement Account), you save and grow your retirement investments tax-deferred, and pay no tax on the withdrawals after you retire. And there are no age requirements for withdrawals and contributions. This may complement your income planning strategy in retirement. Some benefits:
- No age limitation. You can make contributions throughout your life as long as you have earned income below certain IRS-defined limits.
- After-tax contributions. You pay regular income tax on the money you put in.
- Tax-free withdrawals. You pay no federal income tax when you take qualified withdrawals and have had the account for five years. If you are under 59½, you will have to pay a 10% early withdrawal penalty on the earnings unless you qualify for an IRS exception. **The CARES Act also gives some relief as to the taxes due. Further, all Roth IRA distributions before age 59½ will have taxes due on the earnings (contributions are always tax free). The CARES Act will allow you to pay taxes over the next three years.
- Penalty-free withdrawals. You can withdraw contributions (not earnings) tax- and penalty-free before age 59½.
- Maximum contributions. In tax year 2022, the most you can contribute yearly is $6,000; $7,000 if you are age 50 or older.
- Leave it as an inheritance. You never have to withdraw your money. You can even leave it to your heirs for an income tax-free inheritance (there may be estate taxes).
- First-time homebuyer’s exemption. After five years, first time homebuyers can withdraw up to $10,000 tax-free and penalty-free for qualified expenses.
A rollover IRA is an account that allows you to transfer and consolidate an old employer-sponsored retirement account to a traditional IRA. You may have a few accounts from previous employers and managing them all can be challenging. Consider a direct transfer of your account balances into an IRA where your money will continue to grow tax-deferred all in one place. There are some limitations and a few benefits such as:
- Most plans qualify. You can do a tax-free direct rollover from most employer-sponsored plans including 401(k), 403(b), 457 plans, and SEP IRAs.
- Simple, yet different. While rolling over may help simplify your recordkeeping, it’s important to remember that an employer plan may allow loans or penalty-free early withdrawals, while IRAs may not and vice versa. It’s best to speak with a financial professional about the varied benefits and options available to you for each type of plan.
- One straightforward statement. Get a clearer holistic view of your investments once you’ve completed your rollover to consolidate your money. With just one account, there is little chance to lose track or forget about a long lost account.
- Keep on rollin’. Should you change jobs again, you may be able to roll that previous employer plan into your IRA as well.
If you’re a small business owner looking to give your employees a simple but valuable benefit, the SEP IRA is relatively easy to set up and administer.
The Simplified Employee Pension (SEP) is a retirement plan that lets self-employed and small business owners make a tax-deferred retirement contribution to the plan on behalf of each employee. Voya can help you set up a SEP plan for your small business, and serve as the IRA custodian holding assets for each employee. Key features:
- You can set up a SEP plan for yourself if you’re self-employed (sole proprietor or as a partner), with or without employees.
- If you run a business and have employees, a SEP plan covers everyone.
- Contributions are not included as part of the employee’s income.
- Bigger contributions allowed. Contribution limits are higher than with Traditional or Roth IRAs – up to 25% of each employee’s pay with a maximum annual limit of $61,000 in tax year 2022.
- To adjust for cash flow fluctuations, employers can decide on how much to contribute each year or can opt out for a year.
- Contributions could reduce your tax liability. Contributions are deducted from the employer’s income which may reduce current federal income taxes.
- No employee contributions. Only the employer can make contributions.
Big corporations use retirement plans like the 401(k) to attract and keep good employees. Whether you are self-employed or if you have up to 100 employees, the SIMPLE IRA may give you big-time retirement benefits without the big-time start-up and operating costs. Voya can help you set up a SIMPLE IRA plan for your small businesses. We can serve as the IRA custodian holding assets for each employee, too.
- Easy for you. Even the IRS says the SIMPLE IRA is “easy and inexpensive to set up and operate.” To adopt a SIMPLE IRA plan, all you need to do is sign the IRS Model Form 5304-SIMPLE or Form 5305-SIMPLE.
- Something for everybody. You can set up a SIMPLE IRA plan for all kinds of businesses and organizations with up to 100 employees including self-employed, tax-exempt employers, and governmental entities.
- Employer annual contribution limit is $14,000 for 2022.
- A nice perk for all employees. Employees do not have to contribute and they are 100% vested from the beginning. The SIMPLE IRA plan must cover all employees and you generally cannot sponsor another retirement plan.
- Catch-up allowed. Employees over the age of 50 can make their own catch-up contributions of up to $3,000 a year.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. When redeemed, an investment may be worth more or less than the original amount invested. Neither Voya nor its affiliated companies provide tax or legal advice. We recommend that you consult an independent tax, legal, or financial professional for specific advice about your individual situation.
The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Financial advisors and Financial Planning Consultants are Investment Adviser Representatives and Registered Representatives of, and offer securities and investment advisory services through Voya Financial Advisors, Inc (member SIPC).