Traditional IRA
A Traditional IRA may give you an immediate tax benefit because contributions are often tax deductible. With a Traditional IRA, up to $6,000 of tax-deferred earned income in a tax year and $6,500 of tax deferred income in subsequent tax years may be placed in the IRA until the account owner reaches 70½ years of age. Account owners may also contribute an additional $6,000 a year of earned income in a tax year and $6,500 of tax earned income in subsequent tax years to a separate IRA for a non-income-earning spouse. Account owners who are age 50 or over are allowed to contribute an additional $1,000. Taxable distributions from an IRA can be taken without penalty starting at age 59½ and must be started by April 1st of the year following the year the account owner reaches 72.
Basic eligibility requirements
- You must be under age 72 by the end of the calendar year
- You must have earned income or a spouse with qualified earned income
- No income limits
Roth IRA
A Roth IRA’s tax advantages differ from the Traditional IRA. If eligible for this account, your annual contribution limits are the same but are not tax deductible. However, since annual contributions have already been taxed, these contributions will never be taxed again and earnings can grow tax free. Finally, the contributed funds can be withdrawn any time you wish and there are no required minimum distributions after age 70½. Withdrawals of your contributions to a Roth IRA are tax-free anytime. However, withdrawals of earnings are only free from federal income tax, provided they meet the following requirements:
- You are purchasing your first home ($10,000 lifetime maximum)
- The Roth IRA has been in existence for at least five years
- You are age 59½ or older
- You become disabled or have passed away
You can convert a Traditional IRA to a Roth IRA at any time. You must note that when you convert to a Roth IRA, you must pay income tax on the otherwise taxable amount of the transfer. To maximize the benefits of conversion, the money to pay those taxes should come from a source outside the Traditional IRA you are converting. You may convert your Traditional IRA over several years to manage the tax consequences.
Rollover IRA
Consolidate your retirement savings by rolling your old 401(k) over into one convenient, easy-to-monitor account. This can help you better manage your portfolio and can provide access to a broad range of investments, while maintaining the tax-deferred status of your retirement assets. A Rollover IRA is designed as a holding account for funds distributed from an employer’s qualified retirement plan such as a 401(k) or 403(b). Moving funds into a Rollover IRA may allow the account owner to return the funds to another employer’s qualified retirement plan in the future. To initiate a direct rollover from a qualified retirement plan, please contact your plan administrator. Rolling over your old 401(k) into a TD Ameritrade IRA, managed by ShariaPortfolio, is free and there are no setup or maintenance fees. You’ll also avoid costly cash distribution penalties and taxes if you were planning to cash out your accounts.
SEP IRA
A SEP (Simplified Employee Pension Plan) IRA is a retirement plan for self-employed individuals and small business owners and employees. SEP IRAs may not only be attractive to your employees, they can also be quick and easy to set up and administer for your small business. Consider a SEP if your business is new or has variable profits.
Benefits of SEP IRAs
- Simple administration
- No employer tax filing
- No specific annual funding requirements
- Flexible contributions
Employees must be age 21 or older, have earned at least $600 during the year and have worked three out of the five previous years. Employers may adopt less restrictive eligibility requirements so as not to exclude themselves from participating in the plan. A SEP IRA must be established and funded prior to the employer’s tax return due date, plus extension. Contributions can vary by year. All contributions are reported in the tax year received on tax form 5498. In the first tax year, contributions can be 25% of employee’s compensation or $61,000, whichever is less. In subsequent tax years, contributions can be 25% of employee’s compensation or $66,000, whichever is less.
Solo 401(k) (for small businesses)
A Solo 401(k) retirement plan offers the maximum retirement contribution (limits or levels) for self-employed individuals. This retirement plan has high contribution limits and flexible investment options. The Solo 401(k) allows owners to make both employer and employee contributions, providing owners the ability to maximize their personal retirement contributions and their business deductions. Since there are no employees, there are no compliance testing requirements. This is why a Solo 401(k) is most suitable for self-employed individuals or a business owner with no additional employees other than a spouse or a child. Consider this type of plan if your business has irregular profit patterns. Eligible businesses include sole proprietorships, partnerships and incorporated businesses.
Benefits of Solo 401(k) Plans
- Discretionary funding
- Higher contribution limits
- Greater control over withdrawal timing
- Low administrative expenses
A Solo 401(k) must be established by the end of the employer’s tax year and funded by the employer’s tax return due date, plus extension. Contributions can vary by year.
SIMPLE IRA
A SIMPLE (Savings Incentive Match Plan for Employees) IRAs is a retirement program that is easy– administer and salary deferred. It is for employees with an employer match option. Consider a SIMPLE IRA if your business has steady income and your employees want to make contributions to a retirement plan. Employers with 100 or fewer eligible employees who did not maintain another retirement plan are eligible to establish a SIMPLE IRA. Each eligible employee can decide whether or not to participate and how much to contribute. Employer contributions are mandatory. Employee contributions are optional. Employees may contribute up to 100% of compensation or a maximum of $14,000 for a tax year and $16,000 for subsequent tax years. Participants age 50 and over may contribute up to $17,000 for a tax year and $17,500 for subsequent tax years.
The employer matches employee salary contributions dollar-for-dollar up of up to 3% of compensation (this can be reduced to 1% in any two out of five years), or a makes non-elective contribution of 2% of compensation for all eligible employees (including those who decide not to contribute for themselves). The compensation cap for determining the employer non-elective contribution amount is $275,000 for the a tax year and $280,000 for subsequent tax years.
Funds cannot be removed from the SIMPLE IRA until it has been established for at least two years. Withdrawals from a SIMPLE IRA after two years are still subject to federal income tax and/or a tax penalty.
Benefits of SIMPLE IRAs:
- Simple administration and low administrative costs. No maintenance or account fees
- No employer tax filings
- No IRS contribution testing
- Employees can make contributions
- Does not limit eligibility or employee access to funds
This plan is generally suitable for businesses with 100 employees or fewer. It’s usually available when other tax-favored plans are not permitted. A SIMPLE IRA must be established prior to October 1. The employer contribution (match or non-elective) must be made by the employer’s tax return due date, plus extension.