Roth IRAs were introduced in 1996 as the latest addition to accounts made available to individuals for retirement funds. The tax implications for these accounts vary greatly from most IRAs. While tax deductions are not offered on Roth IRA contributions, the limits are the same as those set forth for traditional IRAs. Regular income tax is not paid on withdrawals, which makes Roth accounts different from all other types of IRAs. Six months after a person turns 70 years old, the required minimum distributions are no longer required.
There is also a type of IRA called a simplified employee pension IRA, which is commonly referred to as a SEP IRA. It lets people who are self-employed contribute to their own retirement plans or employees' plans without having to worry about being involved in a qualified complex plan. The majority of small employers like SEP IRAs due to the contributors' eligibility requirement, which includes a minimum age threshold of 21, a $500 minimum for compensation and at least three years of being steadily employed.
For years when business is down, SEP IRAs let employees skip making contributions. Any contributions made by employers cannot be more than the lesser of a specific dollar threshold or 25 percent of an employee's pay. The amount in 2008 was $46,000. However, this number can change from one year to the next, so it is best to discuss the current limits with an agent. Withdrawals made from SEP IRAs during retirement are taxed using the same methods as taxation for ordinary income, which makes them similar to traditional IRAs in that respect. In addition to this, the withdrawal requirements for people who have passed the six-month mark after turning 70 also apply.
The most common choice for an IRA is a traditional one. Every year, millions of various company plans and 401(k) plans are rolled over to become traditional IRAs as employees decide to change jobs or retire. The traditional options are unlike the Roth options in the sense that tax deductions for annual contributions still apply if a person's income is less than a certain amount each year. In the eyes of the IRS, these are considered pretax contributions, so withdrawals are taxed as ordinary income when they are made later in life. Traditional IRA holders are required to take RMDs six months after they turn 70. For more information about these types of accounts, discuss concerns with an agent.