Investing Basics: Personal IRAs

Saving enough for retirement can be a struggle. Many people work hard only to find they have too much month and not enough money.

If you qualify for a workplace 401(k) or 403(b), that’s the place to start. Often, companies match savings into those accounts, and you get the extra incentive of tax savings.

Yet a personal IRA can be an important part of the mix. They come in a variety of forms with a variety of purposes. Here’s a quick breakdown:

Traditional or “rollover” IRAs

When people talk about IRAs, this is what they usually mean. If you are maxed out at your workplace 401(k) plan, you probably can’t contribute to one of these. However, a household with a single-earner can use a spousal IRA to save more and enjoy a tax break for doing so.

Likewise, traditional IRAs are useful containers for past 401(k) plan proceeds, which you then “roll over” upon leaving a job. You can roll your money into your new workplace plan instead, but a traditional IRA is more flexible and offers the same tax-deferral features.

Roth IRAs

Unlike traditional IRAs, the Roth IRA is limited to after-tax contributions. So, there’s no immediate incentive to put money aside in them. Ignoring the Roth option, however, can be a mistake. Any money you set aside here grows tax-free, and Roth IRAs are much more flexible when it comes to withdrawals.

You can trade inside a Roth without having to worry about capital gains taxes, just like a traditional IRA, and tax-free withdrawals in retirement are a powerful retirement income tool.

SEP and SIMPLE IRAs

If you run a small business or have a small number of employees, these plans allow you to run a 401(k)-type operation at a reduced cost. SIMPLE plans allow for matching contributions for your employees.

Self-directed IRAs

Most personal IRAs these days are, in practice, self-directed IRAs. If you open an IRA at a large brokerage, they will offer you a bevy of mutual funds designed to take away the work of selecting investments and, in some cases, they will offer portfolio management services at a fee.

However, you usually are free to make your own calls on which investments to buy, and it’s perfectly okay to hire an advisor to run your IRA for you, through the brokerage.

You can mix and match these IRAs and your 401(k) plan at work and effectively control your tax rates now and later, in retirement. A financial advisor should be able to help you design exactly the right combination.