How many types of ira are there

Individual Retirement Accounts (IRAs) were created to give people a tax-advantaged way to save for retirement. The biggest advantage is not having to pay taxes on investment earnings (gains, interest, or dividends) while your assets are in the account. The earlier you start to save in an IRA, the more time you have for those savings to potentially grow through the power of tax-advantaged compounding.

Tax advantages increase earning potential

IRAs offer the potential for growth in a tax-advantaged account. Over time, that can make a significant difference in your retirement savings. Let’s look at a hypothetical example that starts with a contribution of $6,000 a year, at a 24% cumulative tax rate, and a 6% annual fixed rate of return.

Hypothetical value of $6,000 in annual contributions over 30 years

In a taxable account, the value would be $77,307 after 10 years, $198,053 after 20 years, and $386,648 after 30 years. In a tax-advantaged account, the value would increase to $83,830 after 10 years, $233,956 after 20 years, and $502,810 after 30 years.

This hypothetical example assumes an annual fixed rate of return of 6% and a 24% cumulative tax rate with $6,000 annual contributions and taxes in the taxable account paid annually. This example does not consider the advantage of deductible contributions. The growth of the tax-advantaged account is before-tax and distributions are subject to an ordinary income tax rate and may be subject to a 10% additional tax if taken prior to age 59 1/2. This hypothetical example does not represent the returns of any particular investment and should not be used to predict or project performance. There is no guarantee you will earn 6% on investments and your account value may fluctuate over time. Investing involves risk, including the possible loss of principal. It assumes all earnings are reinvested and does not include transaction costs, fees, or expenses associated with the account or any individual investments made in the account.

If the potential expenses of the hypothetical investment had been reflected, the ending value of the tax-deferred investment could be lower. 

Lower tax rates on capital gains and dividends could make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown.

Changes in tax rates and tax treatment of investment earnings may impact the comparative results. You should consider your personal investment horizon and income tax bracket, both current and anticipated, when making an investment decision as these may further impact the results of the comparison. Wells Fargo does not provide tax or legal advice. Please see your tax and legal advisors for guidance.

Consider saving for retirement in an IRA if:

• You don't have access to a qualified employer sponsored retirement plan (QRP), such as a 401(k), 403(b), or governmental 457(b) plan. 
• You are a non-working spouse, file a joint tax return, and would like to save for retirement.
• You're already saving in your QRP but would like to supplement your retirement savings.
• You're changing jobs or retiring and want to know the distribution options for your QRP.
• You have contributed the maximum amount to your QRP and would like to save an additional amount in an IRA.

Need more information? Review our IRA Frequently Asked Questions.

Choose between two types of IRAs

There are two main types of IRAs: Traditional and Roth. Both types of IRAs offer investment flexibility, tax advantages, and the same contribution limits. For more information about the differences between the two types of IRAs, including details about eligibility, visit the Traditional vs. Roth section of our IRA Center. Also, find out more about converting to a Roth IRA .

Wells Fargo has the right IRA for you

Wells Fargo can support you in your retirement planning process by providing the guidance needed to make informed choices. We begin with manageable steps that carefully balance your long- and short-term needs, working with you to design a plan to match your vision for tomorrow.

We have a variety of ways you can work with us. Get started by choosing an account.

We’re here for small business

Wells Fargo understands the unique investment and retirement challenges of business owners and the self-employed. Whether you need IRA information, a retirement plan for you and your employees, or a business valuation, you can count on us to address your financial needs. We have retirement planning ideas designed specifically for you and your business.

Today, anyone with a traditional IRA may convert it to a Roth IRA. However, your ability to contribute to a Roth IRA may be restricted: in 2011, phase-outs kick in for joint filers whose modified adjusted gross income (MAGI) exceeds $169,000 and single filers whose MAGI exceeds $107,000.5

SIMPLE IRA.
Contribution limit of $12,000, $2,500 catch-up contribution allowed if you are 50 or older6
SIMPLE IRAs are qualified retirement plans for businesses with 100 or fewer employees. They are much easier (and more affordable) to administrate than 401(k) or 403(b) plans. They are funded by “elective deferrals” (salary reduction contributions from employees), and generally the employer has to match employee contributions on a dollar-for-dollar basis up to 3% of an employee’s compensation.6

SEP.
Contributions cannot exceed $51,000 or a maximum of 25% of employee compensation7
SEP stands for Simplified Employee Pension. These traditional IRAs are set up by an employer for employees, and like a pension plan, funded by employer contributions only. Contributions are tax-deductible, but qualified withdrawals taken after age 59½ are taxed at standard income tax rates. If an employer implements an SEP plan, allocations to all employees’ SEP-IRAs must be proportional to their salary/wages.7

Individual Retirement Annuity.
Maximum contribution set at traditional or Roth IRA contribution limits8
Some annuity contracts allow you to set up a traditional or Roth IRA with a life insurance company. Payments to the annuity may be made by the annuity owner or another party. The annuity owner’s entire interest must be fully vested, and the owner cannot transfer any of the balance to someone else.8

Spousal IRA.
Contribution limit of $5,500, $6,500 if you are 50 or older9
This is actually a rule that lets a working spouse make traditional or Roth IRA contributions on behalf of a non-working or retired spouse. The working spouse’s income is the determining factor as to whether or not a “Spousal IRA” contribution can be made. Contribution limits and eligibility requirements are the same as those for a regular IRA.

Inherited IRA.
No contributions allowed in some cases
A Roth or traditional IRA inherited by a non-spousal beneficiary. You cannot treat this IRA as your own. (If you inherit your spouse’s IRA, you can name yourself as the new owner and sole beneficiary and make contributions and withdrawals from it.) Distributions from inherited IRAs are subject to the minimum distribution rules; they must be taken over your lifetime, and the inherited IRA assets cannot be rolled over into an IRA you own.10 Inherited traditional IRAs may not be converted into Roth IRAs, but thanks to IRS Notice 2008-30, non-spouse beneficiaries of company retirement plan assets may now convert those inherited assets into Roth IRAs.11

Group IRA.
Contribution limit of $5,500, $6,500 if you are 50 or older1
A “Group IRA” is simply a traditional IRA offered by employers, unions, and other employee associations to their employees, administered through a retirement trust.

Rollover IRA.
Contribution limit of $5,500, $6,500 if you are 50 or older1
Assets distributed from a qualified retirement plan may be rolled over into a traditional IRA, which may be converted later to a Roth IRA. Assets can be commingled within the IRA and rolled into another employer plan in the future.12

Education IRA (Coverdell ESA).
Contribution limit of $2,00013
The Coverdell ESA provides a vehicle to help middle-class investors save for a child’s education. Parents, guardians, and even corporations or partnerships can currently make nondeductible contributions totaling up to $2,000 annually into a Coverdell ESA on behalf of a minor. Starting in 2013, only individuals will be able to make contributions of $2,000 maximum per Coverdell ESA beneficiary. You get tax-free growth and tax-free withdrawals, provided the money is used for education expenses. Starting in 2013, any distributions that you use to pay elementary or secondary school expenses will be taxed. Contributions to a Coverdell ESA are not deductible.13

The bottom line.
You should consult a qualified financial advisor regarding your IRA options. There are many choices available, and it is vital that you understand how your choice could affect your financial situation. No one IRA is the “right” IRA for everyone, so do your homework and seek advice before you proceed. Call our office at (214) 720-4400 or click here to set your appointment with MGAM today.

Citations.

1. http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limitsl [01/18/13]
2. irs.gov/publications/p590/ch01.html#d0e8323 [11/19/08]
3. fool.com/Money/AllAboutIRAs/allaboutiras03.htm [11/19/08]
4. irs.gov/publications/p590/ch02.html#d0e9236 [11/19/08]
5. http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Contributions [03/05/13]
6. irs.gov/retirement/participant/article/0,,id=211345,00.html [11/1/10]
7. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions [02/13/13]
8. investopedia.com/terms/i/individual_retirement_annuity.asp [11/19/08]
9. irs.gov/retirement/participant/article/0,,id=211358,00.html [11/1/10]
10. usatoday.com/money/perfi/taxes/2007-04-13-aicpa13-saks_N.htm [4/13/07]
11. irahelp.com/newsletter/files/0088-2008-APR%20(1).pdf [4/08]
12. fool.com/Money/AllAboutIRAs/allaboutiras02.htm [11/18/08]
13. economy.kansascity.com/?q=node/11047 [6/10/11]

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

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