IRA Calculator

About IRAs

In the United States, an IRA (individual retirement account) is a type of retirement plan with taxation benefits defined by IRS Publication 590. It is a government tax break to incentivize people to invest money for retirement.

Traditional IRA

As the most common IRA in use, traditional IRAs are qualified retirement plans that have tax shields in place for funds set aside for retirement. They are ideal for people who want to reduce a tax bill while at the same time saving for retirement.

Taxation only occurs when withdrawing before or in retirement. However, early withdrawals will be penalized, except in qualified cases. The contributions made are tax-deductible for most people as long as several requirements, dependent on tax-filing status and gross income, are met. After age 59 ½, withdrawals from traditional IRAs are penalty-free. Traditional IRA withdrawals are not required until after age 73 when it becomes mandatory to take the required minimum distribution (RMD). Most people are eligible for traditional IRAs.

Roth IRA

These are often initiated and managed by individuals with contributions coming from after-tax income or assets. Investment income is tax-free, and withdrawals are tax-free. After turning age 59 ½, withdrawals from Roth IRAs are penalty-free. However, Roth IRA withdrawals are not mandatory during the owner’s lifetime. Without distribution, Roth IRAs can grow tax-free throughout the owner’s entire lifetime.

SEP IRA

Simplified Employee Pension (SEP) IRAs, which are initiated by employers, allow employers to make contributions to the IRA accounts of their employees. SEP IRAs are mostly used by small businesses or self-employed individuals, so they are designed to be easier to set up than other IRAs. They function similarly to traditional IRAs in tax treatment, balance accumulation, and distribution. Employers may deduct contributions as business expenses.

SIMPLE IRA

Savings Incentive Match Plan for Employee (SIMPLE) IRAs are mainly designed for small businesses with 100 or fewer employees, as the administrative costs associated with a SIMPLE IRA are much lower than those required by a 401(k). Also, employers may deduct contributions as business expenses. For this retirement plan, employers must choose between two matching options for their employees.

IRA Rollovers

Existing qualified retirement plans, such as 401(K)s, 403(B)s, SIMPLE IRAs, or SEP IRAs, can be “rolled over,” or consolidated, into a traditional IRA. Many other plans, including 457 plans or inherited employer-sponsored plans (for designated beneficiaries), can also be rolled over. There are no taxes due when rolling over company plans directly into IRAs.

Comparison to 401(k)s

Traditional IRAs and 401(k)s are two of the most popular tax-deferred, defined contribution retirement plans. Both turn pre-tax income into tax-deductible contributions that are placed into retirement plans that receive tax-sheltered growth, with the goal of incentivizing saving for retirement.

Investment Options in an IRA

One beneficial aspect of IRAs is that because they are available through most financial firms, there are ample investment options to choose from. The following are some common options along with their strengths and weaknesses.

Active Investing in Individual Stocks or Similar Assets

Active investing requires a more proactive, hands-on approach that involves investors actively picking and choosing stocks, making an effort to learn about the market and the stocks in which they invest, and making more frequent decisions on how to proceed with their investments.

Mutual or Index Funds

A mutual fund is a pool of money sourced by individual investors, companies, and various organizations that is managed by a fund manager whose role is to invest the pool of money accordingly. Investment strategies differ based on the fund manager and type of mutual fund.

Robo-Advisors

Robotic financial advisors, or “robo-advisors,” are a type of financial advisor that use low-cost, automated systems as a means to manage investments. Usually, robo-advisors can help set up customized, diverse portfolios catered to each individual within minutes.

Self-Directed IRA

A self-directed IRA (SD-IRA) can be set up in place of a traditional or Roth IRA (not SEP or SIMPLE) and will have the same characteristics regarding eligibility, contributions, and distributions. It is estimated that SD-IRAs make up only about 2% of all IRAs.