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IRAs Explained

Individual retirement accounts (more formally known as "Individual Retirement Arrangements"), or IRAs, are a method for saving money for retirement that is either tax-free or tax-sheltered (or arranged to minimize tax liability). There are several types of IRAs. Each comes with its own benefits, rules, and contribution limits.

If you set up your IRA through a brokerage firm, you’re able to invest your funds in stocks, bonds, mutual funds, real estate, and various other government-approved asset classes. Let’s cover the different types of IRAs and their fundamentals.

Traditional IRAs

A Traditional IRA allows you to deposit pre-tax earnings. These funds are for distribution after you reach retirement age.  You contribute funds and receive a tax deduction, and your money is sheltered from taxes until you withdraw it at retirement time. The idea here is that you won’t withdraw the funds until you stop working, so the distribution you receive from the IRA will be taxed at a lower rate. 

Some key fundamentals for this type of IRA are:

  • If you tap into your nest egg before you are 59.5 years old, there is a 10% penalty on top of the other taxes due
  • You must begin withdrawing funds at age 70.5
  • For the 2017 tax year, the traditional IRA contribution limit is $5,500 per person
  • Thereafter it is indexed for inflation in $500 increments
  • If you are 50 or older, you can make additional “catch-up” contributions above the government limit to $6,500


For individuals and heads-of-household with an employer-sponsored retirement plan, Traditional IRA contributions are only tax-deductible if your modified adjusted gross income (AGI) is less than $62,000 to $72,000. The income phase-out range is $99,000 to $119,000 for married couples when the contributing partner is covered by an employer pension plan. You can still contribute to a Traditional IRA. The caveat is you can’t deduct the contribution from your income for tax purposes.

Roth IRAs

The Roth IRA is a creation of the Taxpayer Relief Act of 1997. With this retirement account, your funds are invested after tax. That means you have already paid taxes on the money you deposit and do not get a tax deduction for Roth IRA contributions. However, account funds grow tax-free, and when you turn 59.5 years old, you can begin making withdrawals without penalty (to satisfy government-imposed IRA withdrawal requirements). 

Some key account features are:

  • IRAs Explained imgSince you already paid taxes on your income before you deposited it, Roth IRA distributions are tax-free
  • The interest or investment income which the account earns is also free from taxation
  • Roth IRAs have the same contribution limits as traditional IRAs
  • Moreover, the Roth IRA does come with contribution limits which change from year to year – check with your advisor or the IRS for updated information


In the 2017 tax year, single persons and heads-of-household with an AGI of $118,000 to $133,000 can still contribute to a Roth IRA. For married couples filing jointly, contributions are allowable at an AGI range of $186,000 to $196,000. Because these figures change from year to year, consult with your advisor for up-to-date information.  

SEP-IRAs

An SEP-IRA stands for a “Simplified Employee Pension Individual Retirement Account.” The rules governing SEP-IRAs are much more complex than the rules for traditional and Roth IRAs. Oftentimes, these accounts are used by self-employed business owners with enterprises of few or no employees. 

Broadly speaking, an SEP-IRA has the same general features as a traditional IRA. However, it has much higher contribution limits. Contributions made to each employee’s SEP-IRA can’t exceed the lesser of 25% of compensation, or $54,000 for the 2017 tax year (this is subject to cost-of-living adjustments for later years). Funds can’t be withdrawn until you’re aged 59.5, and account withdrawals are required by the age of 70. 

More rules apply, consult with your advisor for details.  

SIMPLE IRAsiras explained image pic

A SIMPLE IRA stands for “Savings Incentive Match Plan for Employees.” It is another account type of choice for many small business owners. This vehicle enables an employer to match at up to 3% of employees’ contributions. In the 2017 tax year, the contribution limit is $12,500 per person. For people aged 50 and older, “catch-up” contribution limits are set at $3,000. 

Other features include:

  • SIMPLE IRAs offer an alternative to 401(k) plans for small business employees and self-employed persons
  • Like with Traditional IRAs, deposits are tax-deductible
  • Business owners can act as both employee and employer – they can deposit the maximum contribution as well as the 3% employer match

Holding More than One IRA Possible

You can hold more than one IRA for maximizing tax benefits. However, keep in mind that Traditional and Roth IRA contribution limits are consolidated. In other words, you’re able to contribute a total of $5,500 to any combination of Traditional and Roth IRAs.

Nonetheless, you can make contributions to an SEP-IRA or a SIMPLE IRA along with a traditional or Roth IRA. To determine the maximum amount of tax shelters you may use, or any other retirement planning needs, consult with a qualified financial professional for guidance. 

Ready for personal guidance with your retirement future? SafeMoney.com can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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