IRAs: Traditional, Roth, SEP, and Simple
Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.
IRAs provide many tax advantages to help you save for retirement. Each type of IRA offers different tax benefits and has different rules for qualifying.
IRAs Compared
Here’s a look at the basics of each type of IRA.
| Traditional IRA | Roth IRA | SEP IRA | Simple IRA | |
|---|---|---|---|---|
| Type | Individual Account | Individual Account | Employer Plan | Employer Plan |
| Tax Deduction on Contributions | Yes, if under income limits | No | Yes | Yes |
| Taxes in Retirement | Ordinary income taxes on amount withdrawn. If made non-deductible contributions, no tax on that portion. | No taxes on earnings or contributions. | Ordinary income taxes on amount withdrawn. | Ordinary income taxes on amount withdrawn. |
| Make Your Own Contributions | $6,500 per year* or $7,500 if age 50+ | $6,500 per year* or $7,500 if age 50+ | No, but your brokerage may let you make your traditional IRA contributions to the same account | $15,500 ($19,000 if age 50+) not to exceed 100% of your compensation |
| Employer Contributions | No | No | Up to 25% of compensation (20% if self-employed) | Either 3% match or 2% to every employee regardless of employee contributions |
*The $6,500 or $7,500 limit is for all of your contributions to traditional or Roth IRAs for the year. The limits aren’t separate for each IRA type, and you can’t open additional IRAs to increase your limits.
What is a spousal IRA?
The spousal IRA rules allow a spouse who isn’t working to contribute to either a traditional or Roth IRA based on their spouse’s income. A spousal IRA isn’t a separate type of IRA — it’s an exception to the usual rule that an individual must have earned income to contribute to a traditional or Roth IRA. All the other usual rules for traditional or Roth IRAs still apply.
What is a real estate IRA?
A real estate IRA is a special type of IRA account. Most traditional and Roth IRAs are with brokerages that limit you to investing in stocks, bonds, mutual funds, ETFs, and similar investments. Real estate IRAs are traditional or Roth IRAs that allow you to invest in real estate.
What are the income limits to get a deduction for traditional IRA contributions?
| Filing Status | 2023 | 2022 | 2021 |
|---|---|---|---|
| Single and Head of Household | $73,000 to $83,000 | $68,000 to $78,000 | $66,000 to $76,000 |
| Married Filing Jointly and Qualifying Widower | $116,000 to $136,000 | $109,000 to $129,000 | $105,000 to $125,000 |
| Married Filing Separately | $1 to $10,000 | $1 to $10,000 | $1 to $10,000 |
If your income is up to the lower number, you can make a full contribution. Your contribution drops to $0 once you reach the second number.
What are the income limits to use a Roth IRA?
| Filing Status | 2023 | 2022 |
|---|---|---|
| Single and Head of Household | $138,000 to $153,000 | $129,000 to $144,000 |
| Married Filing Jointly and Qualifying Widower | $218,000 to $228,000 | $204,000 to $214,000 |
| Married Filing Separately | $1 to $10,000 | $1 to $10,000 |
If your Adjusted Gross Income is up to the lower number, you can make a full contribution. Your contribution drops to $0 once you reach the second number.
What is the advantage of a SEP IRA or Simple IRA over a 401(k)?
Employers who use a SEP IRA or Simple IRA instead of a 401(k) usually do so because of administrative costs. Employers often need to pay to set up a retirement plan plus annual fees to run it. Traditionally, SEP and Simple IRA providers charge lower fees than 401(k) providers. SEP and Simple IRAs can often have less paperwork involved.
Frequently Asked Questions About IRAs
Here are some frequently asked questions about IRAs.
Is it better to have a 401(k) or IRA?
You can have both a 401(k) and IRA. The limits to contribute to a 401(k) and IRA are separate.
If you can’t contribute the full amounts to both, here is the order most people follow.
- Contribute enough to your 401(k) to maximize your employer match.
- Contribute to the account with better tax benefits for your income level. For example, you may want to deduct your contributions, but your income is too high for a traditional IRA, so you’d want to contribute to your 401(k).
- Contribute to the account with better investment options. This will often be your IRA since you can shop around, but some employers make it a priority to have good options in their 401(k)s.
- Contribute to an IRA because you have more flexibility to withdraw money if you need it or to change IRA providers.
Is an IRA a good investment?
An IRA is a place to hold your investments. You can invest in almost anything in an IRA if you have the right type of IRA. Talk to a financial advisor about which investments are right for your goals.
What age can you start an IRA?
You can start an IRA at any age as long as you have earned income.
Parents can’t open an IRA for a child who isn’t working yet. Parents can give a child money to put into an IRA as long as the child doesn’t contribute more than their earned income for the year.
How does IRA money grow?
IRA money grows based on both your contributions and compounding. Riskier investments, like stocks, will generally grow more over time but also have a risk of losing money, especially in the short term.
If you want to know how much money an IRA makes, Vanguard has a good overview of historical returns based on how you invest your money.
Should I open an IRA with my bank?
Banks often offer IRA savings accounts or CDs. Most investors, especially those who are younger, prefer to use brokerage accounts to get higher returns.
Can you have multiple IRAs?
You can have as many IRAs as you want. The only limit is that you can’t exceed your single contribution limit across all of your IRAs for the year.
How much should I put in my IRA each month?
Many financial experts recommend saving 15% to 20% of your income for retirement. This includes both your IRA and other investments.
Some people divide their annual contribution limit by 12 to maximize their contributions. Others pick a number that works for their goals and monthly budget.
If you’re worried about being over the income limits for an IRA or not sure how much you can contribute, you can put the money in a savings account for now. You have until your tax filing deadline to decide on and make your IRA contribution.
Do banks charge for IRAs?
Many banks and brokers offer IRAs with no account fees or trading fees. There isn’t usually a good reason to go with a bank that charges fees.
How many times can I withdraw from my IRA in a year?
You can withdraw money from your IRA as many times as you need to. If you haven’t hit retirement age, you may owe additional taxes and penalties for making an early withdrawal.
Can I use my IRA for a downpayment on a house?
If you’re a first-time homebuyer, you can take advantage of special rules to withdraw from your IRA for a downpayment. You can withdraw:
- All of your Roth IRA contributions without taxes or penalties as long as you’ve had a Roth IRA for at least five years
- Up to $10,000 from a traditional IRA or from your Roth IRA earnings with no penalty (but regular income taxes apply)
What should you do if you contributed too much to an IRA?
If you contributed more than the limits, contact a tax professional as soon as possible. Large penalties often apply until you take out the excess contributions and related earnings.
Do you pay IRA capital gains tax?
There are generally no taxes on any trades you make inside of your IRA. Taxes usually only come into play when you withdraw money from your IRA.
How does contributing to IRA reduce taxes?
A deductible IRA contribution gives you a tax deduction equal to your contribution. For example, if you contribute $6,500, you reduce your taxable income by $6,500.
If you receive the Saver’s Credit for an IRA contribution, the amount of tax you owe reduces by the amount of your credit. For example, if you receive a $1,000 credit, you’ll owe $1,000 less in taxes.
Is there a Roth IRA tax deduction?
There is no deduction for Roth IRA contributions. If you have low to moderate income, you may be eligible for the Saver’s Credit which is worth up to 50% of your first $2,000 in retirement account contributions for the year.