The Right IRA Account for You

Who says retirement plans are difficult to understand? Here are your options, fully decoded.

Traditional IRA

Whom it’s for: Those whose annual gross income exceeds $122,000 ($179,000 for joint tax filers).

Annual contribution: Up to $5,000 a year; up to $6,000 if you’re over 50.

Tax status: This is a tax-deferred account, so you don’t pay federal or state income tax on any earnings or contributions you make until you withdraw the funds.

Early-withdrawal penalties: You’ll pay income tax on your withdrawal, plus a 10 percent penalty fee on any money that you take out before you turn 59½.

Required withdrawals:  You must stop contributing by April 1 of the year following the calendar year you turn 70½ and start withdrawing money annually (even if it’s just $10).

ROTH IRA

Whom it’s for: Those who are at least 15 years away from retirement.

Annual contribution: Up to $5,000 a year; up to $6,000 if you’re over 50.

Tax status: You pay federal and state income taxes on your contributions now. When you withdraw money later on, any earnings you have made are tax-free.

Early-withdrawal penalties: You’ll pay income tax on your withdrawal, plus a 10 percent penalty fee on any earnings if you make withdrawals within five years of opening the account.

Required withdrawals:  None. You can keep your money stashed for as long as you like. In contrast to traditional and SEP IRAs, you can keep contributing to it after you turn 70½.

SEP IRA

Whom it’s for: Those who are self-employed, work freelance, or own a small business.

Annual contribution: Up to 25 percent of your annual income, with a maximum of $49,000.

Tax status: This is a tax-deferred account, so you don’t pay federal or state income tax on any earnings you make until you withdraw the funds.

Early-withdrawal penalties: You’ll pay income tax on your withdrawal, plus a 10 percent penalty fee on any money that you take out before you turn 59½.

Required withdrawals: You must stop contributing by April 1 of the year following the calendar year you turn 70½ and start withdrawing money annually (even if it’s just $10).