How to Determine Which Individual Retirement Arrangement to Go With?



 
There really is no perfect answer to the question "What is the best type of IRA?"  The honest answer will depend on factors such as your income level, age, and the type of employment. Which IRA you should invest in is up to you to decide based on the following facts:

Traditional IRA

Since the traditional IRA would lower your income by the amount contributed and would defer taxes, it would be ideal for those who would like to lower their income to pay less tax. For example, someone who is earning $166,000 per year before taxes and falls in the 33% tax bracket would want to open an IRA account to able to deduct $5000 from his income to have an annual income of $161,000 to fall into the 28% tax bracket.


Roth IRA

The Roth IRA plan is ideal for those who have incomes below the limit to qualify for the plan. Those with incomes below the limit would pay less taxes so it would be more advantageous for them to pay less taxes now, contribute money to the Roth IRA, and allow it to grow tax free. The Roth IRA is ideal for students and low to upper middle income earners.


Simple IRA

This account is ideal for those who want an employer-sponsored account that gives more leverage to the individual in deciding how much to contribution each month. For those working for a company with 100 employees or less, the SIMPLE IRA is a great option to take advantage of because it has a higher contribution limit than other IRAs.


Simplified Employee Pension (SEP) IRA

This plan is a great option for those who are self-employed because it allows you to establish your own retirement plan and at the same time have another retirement plan under another company.

This plan is best for those with high incomes because the plan allows contributions of up to $45,000, or 25% of the employee’s income. With a higher income, this 25% would be higher and closer to the $45,000 limit.