Types of IRAs

Types of IRAs

October 25, 2022

The world of finance loves its acronyms! IRAs or Individual Retirement Accounts are great vehicles to give you the biggest bang for your buck and have been described as the “biggest tax break in history.” This is because in most cases, money put into an IRA is shielded from taxes until distribution and has a double benefit of not being taxed in the calendar year you earn it. If you have a short term view, this may not seem like such a big deal, but if you start early, this could amount to thousands to hundreds of thousands of dollars in tax savings.

If you have a work retirement plan, that should be the first place you should be saving. You would likely have access to lower cost investment funds than the general public, the ease of automatic deferrals from your paycheck, no income limits, and higher contribution limits. In 2022, the most you can contribute to a Traditional and also a Roth IRA is $6,000 ($7,000 if you’re age 50 or older). For an employer retirement plan, you can defer up to $20,500 of your salary (+$6,500 if you are 50 or older).

As I mentioned previously, a benefit of a work retirement plan is the lack of income limits for you to contribute. The IRS has guidelines on whether you can deduct your IRA contributions which is explained here. However, if you have an employer who does not offer a retirement plan or are an unemployed spouse, then an IRA would be the best way you could save for retirement. The types of available IRAs is as follows: 

  • Traditional IRA: The most common of all IRAs, contributions to this IRA are tax deductible or excluded from income in the calendar year you earned and made the contribution. Your principal and earnings grow tax deferred and your distributions are fully taxable as ordinary income in the year you withdraw the funds. If you withdraw any portion prior to turning 59½, you are subject to a 10% penalty and taxes on the amount distributed. You are also required to distribute a minimum amount every year starting at age 72. 

  • Non-deductible IRA: This type of IRA is for people who do not meet the income limits to deduct IRA contributions. You could make a contribution to a non-deductible IRA and not receive the benefit of the tax deduction, but still benefit from the tax deferred growth. Distributions from this IRA follow the same rules as a Traditional IRA.  

  • Roth IRA: Although you do not get a tax deduction for contributions to this type of IRA, it is such an amazing option because you get the benefit of tax free distributions of your earnings, as well as the tax differed growth while the money is in the IRA. A Roth IRA is especially beneficial to younger workers, those who do not plan to distribute the money for several years and also wealthy clients who do not plan to use these savings in retirement. Roth IRAs do not have required minimum distribution requirements at age 72 like a Traditional IRA, which is why they can be ideal for clients who intend to pass this money on to heirs. There are exceptions in terms of distribution, such as qualified education expenses, first time home purchases, and birth or adoption expenses that allow you to avoid a 10% penalty.  

There are IRAs like Simple and SEP IRAs that you can explore if you own a business. However, the decisions around a retirement plan for your small business are much more nuanced and should be discussed with your CPA and Financial Advisor.

In short, any way that you can allow your savings to grow tax free is an added benefit to investment compounding and should be taken advantage of whenever possible. As Robert Kiyosaki is credited with saying, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”


DISCLAIMER: Sathya Chey is a registered representative with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.