Why Are There Different Retirement Accounts?

Planning for the future starts today, which is why investing in a retirement fund is often the healthiest long term financial choice a person can make. Although retirement funds are incredibly beneficial, the reality is that many of these funds have different mechanics, some options are better than others depending on your work and financial situation. To help you understand the various types of retirement funds, here are our thoughts.

Roth IRA

A Roth IRA is similar to a traditional IRA with one main difference, the owner of the account pays taxes on the money before they invest it. Traditional IRAs tax the money you initially invested and the interest that your account accrues overtime. However, Roth IRAs do not tax earnings from your investments, nor do they typically tax the withdrawals that someone makes. Therefore, Roth IRAs help people keep their investments safe from taxes in exchange for taking an immediate hit on their tax breaks.

Traditional IRA

A traditional IRA is an account where money goes directly into a retirement account without getting taxed. While you are saving yourself from being taxed on that money now, the reality is that the money your investments make in the future will be taxed along with the money you withdrawal. Traditional IRAs are good for folks who are currently in a high seated tax bracket, but will retire in a lower tax bracket.

SEP IRA

A SEP IRA is fairly similar to a traditional IRA, but it is specifically for self-employed workers or small business owners. Contributions to these accounts earn tax breaks for the self-employed, but money that is withdrawn from an IRA will be taxed on withdrawal. Additionally, earnings made form SEP IRA’s will also be taxed, just like a traditional IRA.

If you are interested in starting a retirement account, you should talk to the professionals before making a decision. Reach out to American Investment Planners to get the answers you need about retirement investing!