By: Chiara Accardi

For many, an IRA is considered the go-to retirement account, with nearly 65 million taxpayers having some type of IRA. But for new investors, determining which type of IRA they should use—as well as who should manage it—can feel daunting.

Between traditional, Roth, SIMPLE, and SEP IRAs, there are many options you can use to fund your family’s future retirement. As Ramsey Brock, president of Brock Asset Management explains, understanding the differences between these types of IRAs and how they relate to your own financial situation will help you make the right decision.

1. Understand Differences Between Types of IRAs

First, Brock recommends that investors gain at least a basic understanding of the different types of IRAs. “Most people only need to focus on the differences between traditional and Roth IRAs, as SIMPLE and SEP IRAs are for businesses and self-employed individuals,” he explains.

“Roth and traditional IRAs have the same contribution limits and penalize you if you make a withdrawal before age 59 1/2. The main difference is how they are taxed — traditional IRA contributions are tax deductible if you meet the eligibility requirements, but withdrawals are taxed as ordinary income. Roth IRA contributions are made with after-tax funds, but withdrawals are tax-free.”

It’s worth noting that SEP and SIMPLE IRAs allow for higher contribution amounts but are taxed like traditional IRAs. SIMPLE IRAs also allow for employee contributions.

2. Decide Your Investment Preferences

Brock recommends that families decide their investment preferences for retirement, particularly their risk tolerance, as part of determining which type of IRA is ideal for their needs.

“IRA portfolios will often include a mix of lower-risk and higher-risk investments,” he explains. “Low-risk options include CDs, U.S. savings bonds or Treasury bills, while higher-risk options include mutual funds, stocks, bonds and ETFs. The proportion of the portfolio accounted for each type of investment determines its overall risk — and that should align with your personal risk tolerance. Generally speaking, however, retirement investments should err toward being more conservative.”

3. Consider Your Current and Projected Income

Another consideration in determining which type of IRA is ideal for you is your current income level and your projected income to be in retirement. This requires a thorough evaluation of your income and expenses and your existing retirement savings (when applicable). You should also consider your future needs and financial goals.

“How your income compares now and in the future should play a major role in whether you choose a Roth or traditional IRA,” Brock says. “For people early in their careers, a Roth IRA can be a good investment because the future tax-free withdrawals will provide major savings in retirement. On the other hand, if you expect your income to be lower in retirement, then a traditional IRA can help you qualify for tax deductions that would be beneficial now.”

4. Know Your Withdrawal Plan

Retirement plans can change — including plans for when you will make withdrawals from your IRA accounts. For both traditional and Roth IRAs, account holders must wait until at least the age of 59 1/2 to make withdrawals or face a tax penalty. But there are some key differences after that.

With a traditional IRA, account holders must withdraw at age 73 and cannot make additional contributions after that point. With a Roth IRA, on the other hand, withdrawals are not required until after the account owner’s death, and there is no age limit on contributions. This added flexibility could be useful for someone who wishes to continue working for a longer period and continue generating compound interest from their IRA if they have other sources of income.

5. Compare Investment Options

“Choosing a financial institution to manage your retirement investments is one of the important decisions you can make,” he notes. “Look at their history and track record, as well as what investment options they offer. While past performance doesn’t guarantee future returns, a background check and evaluation of their track record can give you a better understanding of their performance and legitimacy. You should also be mindful of their fees, such as management fees and trading fees. Know your options to keep your investments safe.”

Overall, finding the right balance of low fees, various investment options that cater to your needs, and a strong history can help you confidently select financial institutions.

Choosing the Right IRA

With these tips, determining which type of IRA is right for you and how you should invest can become a more straightforward decision. By making investments that match your current and projected financial needs and working with a trusted financial provider, you can set yourself up for success in your retirement investments.

Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.

Published by: Khy Talara