If you’re new to investing, the sheer number of options you have can be more than overwhelming. You not only have to decide what to invest in, but you also have to determine what type of account to open and where to open it.
This is the predicament I’ve found myself in.
You see, I’ve just begun to get my feet wet with investing. My first investment was a shot in the dark — I bought a few medical marijuana penny stocks thinking I was going to double my money (feel free to laugh!). Unfortunately that didn’t happen. What did happen was I lost 75% of the money I invested. Lesson learned.
After that investing failure I decided I’d purchase dividend stocks, which I’ve been doing on a monthly basis (and so far the results have been good).
Now I need to move on and start putting money into a retirement account. But with so many options, how in the world do you know where you should put your money?
That was the question I needed the answers to and here’s what I found out.
Your IRA Options
Just in case you didn’t know, there are three popular types of IRAs: the Roth IRA, traditional IRA, and SEP IRA. According to my research, there are actually a total of 11 different IRAs! You can view a list of all of them here.
Here’s a breakdown of the popular three.
With a Roth IRA, you are investing after-tax dollars. This means you won’t have to pay taxes on the money when you withdraw — which is why the Roth is so popular.
The maximum contribution amount for 2014 is $5,500 (or $6,500 if you’re over 50.). There are also income limits regarding opening up a Roth IRA. If you’re single, you can earn up to $114,000 and still be able to contribute the full $5,500. The limit is $181,000 for married couples.
With a traditional IRA, you are contributing pre-tax dollars. This retirement account will lower your income tax bill now and then when you withdraw your money you’ll pay income taxes. The same contribution and income limits apply to the traditional IRA and the Roth IRA.
A Simplified Employee Pension Individual Retirement Arrangement (aka the SEP IRA) is a way for business owners and the self-employed to fund their retirement and also the retirement of their employees.
Like a traditional IRA, the SEP also provides tax advantages. The big difference, though, is that those eligible for the SEP IRA can contribute 25% of their earnings with a max contribution limit of $51,000 per year.
There are stricter rules for business owners with employees. Make sure you thoroughly research these before opening up a SEP IRA.
Which Type of IRA Should You Open?
Now that you know the difference between the popular three, do you know which account you should open?
If you don’t, here are some questions to ask yourself:
- Are you in a lower income tax bracket now than you expect to be in when you withdraw?
- Do you need a way to lower your current tax bill?
- Are you self-employed or a business owner who wants to contribute more than the standard $5,500?
While a Roth IRA is pretty freakin’ awesome due to the tax benefits during withdrawal, I knew the other two options would work better for me.
Now that I’m self-employed, I’m really looking to lower my tax bill in any way that I can, which leaves me choosing between the traditional IRA and the SEP IRA. Both of these offer the same type of tax benefits but each have different contribution limits.
Although I don’t think I’ll be able to contribute more than $5,500 this year, I do like having the option of contributing up to 25% percent of my income. So for me, the SEP IRA has won the battle.
Now I just need to open my account up. Which leaves me with one question: Where’s the best place to open up an IRA?