IRA and Related Retirement Plans

Types of IRAs

Traditional IRA

Also known as a contributory IRA, this is an IRA account funded with your earnings. Depending on your income, you may be able to deduct some or all of the contribution you make to your traditional IRA. There is a limit on contributions which changes annually. For 2008, the maximum contribution is $5,000 (people age 50 and older can contribute and extra $1,000, woohoo)!

Note that the State tax IRA differently--some have rules that mimic the federal rules while other states wont allow you to deduct any of your IRA contributions (but of course, you pay no State income tax when you withdraw funds later).

Rollover IRA

The term rollover IRA usually means funds that were transferred from a company plan such as a 401k, profit sharing or pension plan.

Roth IRA

Similar to a traditional IRA, a Roth account is funded with your after tax earnings However, no part of your Roth contributions are deductible but all withdrawals form your Roth are tax free. For most every worker, funding a Roth IRA is far superior than a traditional IRA.

For 2008, contributions up to $5,000 are allowed ($10,000 for couples), subject to phaseout between adjusted gross income of $101,000 and $116,000 for singles ($159,000 and $169,000 for joint filers). Note that for self employed, you may have a self employed retirement plan yet the same thresholds apply even if you have a SEP, 401(k) or Keogh plan (and even if your spouse is covered by a retirement plan through work of self-employment). So you can contribute the max to your SEP, 401(k) or Keogh anan additional $5,000 (or $10,000) into a Roth IRA. You may contribute an additional $1,000 as a "catch up" if you will be 50 or older at year end. So can your spouse if he or she passes the age test.

SEP IRA

The SEP IRA is for self employed individuals and small business owners and the contribution limits are much higher than traditional or Roth IRAs. In 2008 a SEP IRA has a contribution limit of $46,000. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred.

A SEP IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees

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Most frequently a SEP IRA is established by a business owner without employees and is discussed in detail below.

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In special situations a SEP IRA may be an ideal retirement plan for a business owner with employees.