Different Types of IRA’s In Plain English
What is an IRA and how does it work?
An Individual Retirement Account (IRA) is a form of retirement plan provided by various financial institutions in the United States. These are traditional IRA, Roth IRA, SEP IRA, simple IRA and gold IRA. The plans provide tax advantages on retirement savings by individuals. Taxes are exempted on the savings until you actually withdraw the money at retirement (age fifty-nine and a half years). In simple words IRA is not an investment but it is rather an account where you keep stocks, bonds, mutual funds or other assets. There are several types of IRAs and you can join whichever you are eligible to join. We’ll quickly go over them in this article.
Traditional IRA
With this type of account, you get tax deductions for your contributions. Often this account is described as taking money deposits before tax. The deduction lowers your taxable income and you will not be paying taxes for the amount you set aside for in the traditional IRA. When you withdraw the money, the amount is added to your taxable income and taxed as ordinary income. If you withdraw before reaching the retirement age, you will be charged an additional ten percent on the early distribution.
However if you or your spouse are under a retirement plan provided by your employer, your deductions may be limited or you might not deduct any of your contributions.
Another type of traditional IRA is the non-deductible traditional IRA. It is a tax exempted savings plan. The savings will grow tax-deferred. When you start withdrawing, part of the money will be tax-free while the other part will be taxed as ordinary income. This type of IRA can be opened by individuals covered by retirement plans provided by the employer.
Roth IRA
In this type of account, contributions are made with after tax assets. Similarly, withdrawals are not taxed while other transactions have no tax impact. Roth IRAs have income limitations, you have to meet certain set conditions. However, you can still apply for a Roth Ira you are covered by a retirement plan by your employer.
Simplified Employee Pension (SEP) IRA
These are a type of collective retirement plan. They are established by an employer who then contributes to a traditional Ira set up under the Sep IRA plan. The employer makes contrition on the employees name.it should not be confused with a pension scheme with company name. All transactions are treated as in traditional IRAs.
Simple IRA
Savings Incentive Match Plans for Employees are also a group retirement arrangement. The plan allows contributions, with matching from the employer. Withdrawals are taxed as ordinary income and you will be penalized for early withdrawals. The Simple IRAs offer lower contribution limits than other group retirement plans.
Limits on contributions
You can contribute to any IRA at any time of the year. If you miss to pay your annual contribution for a previous year, ensure to pay before the set deadline of April 15th. For traditional and Roth IRAs the maximum annual contribution is $5,500, while people aged fifty and above can contribute an extra thousand dollars as catch up contribution. In addition, if you are contributing to more than one IRA, the combination should not exceed the set maximum of $5,500.
Gold IRA
What Is A Gold Backed IRA?
Quite simply, it’s a great way to add diversity and a safety buffer against inflation to your investment portfolio.
Since the GFC began in 2008, thousands of people have been increasing their holdings of precious metals (gold, silver, platinum and palladium) to safeguard their savings.
Of these precious metals, gold has always been regarded the world over as a stable and safe investment that carries not only low risk but also high profits. Historically, it has been used by investors to protect their capital and this strategy has been proven successful. So much so, that over recent years, gold as well as the other precious metals has become the first safe-haven investment asset of choice amongst many Americans wanting to protect their investments.
So what is a Gold Backed IRA?
A gold backed IRA is a type of Individual Retirement Account which is backed by physical gold instead of higher risk paper assets like stocks, bonds and mutual funds.
How do they work?
Let’s assume you’re an investor who currently has $20,000 invested in a typical paper-based fund, but you’d like to convert this money into a safer asset like gold.
The first thing you need to do is establish an IRA that thas been specifically designed to hold physical assets like precious metals which your existing funds would be transferred into. Then you need to find a reputable precious metal dealer who will purchase the gold on your behalf using your funds.
Once you have purchased the gold, you have to deposit it with an official gold IRA custodian or a similarly sanctioned precious metal depository firm. These companies will manage all the administration and transaction requirements on behalf of the owner and will charge the owner an annual maintenance/storage for these services. One of the most trusted and value for money gold IRA custodians on the market today is Regal Assets – click here to read my review!
To find out more about the rules and regulations that govern the ownership of precious metals in an IRA, have a read through our explanation of the Gold IRA Rules.
But essentially, there are two main ways to add gold to your retirement portfolio:
Using a self-directed IRA. These retirement accounts allow the account owner to make their own decisions about what assets they would like to invest in. Gold is typically the most favoured asset of choice, but investors can also choose other precious metals like silver, platinum and palladium.
Doing a gold IRA rollover or transfer. This option is for those investors who already have an existing IRA account. Funds within the IRA account can simply be rolled over or transferred into a precious metals Roth IRA or other type of IRA account as many times as you want.
To do the rollover, all you need to do is open a new IRA account with the assistance of an IRA specialist, and approve the rollover request. The newly appointed IRA custodian will then liaise with the previous IRA administrators and arrange for the funds to be transferred.
DID YOU KNOW?… You can use some or all of the funds in an existing IRA account and transfer them, without incurring any tax penalties, into a new self-directed IRA account that has been specifically designed to hold investments backed by gold or other precious metals. Furthermore, it is also possible to convert 401k, 403b, 457b, annuity, pensions and other retirement accounts and plans into a gold IRA investment account completely tax-free and without any penalties.
Why You Should Include Gold in Your Individual Retirement Account
As we’ve seen in recent years, the price of the yellow metal rises dramatically when the stock market crashes and the dollar and other currencies are devalued. Gold is the perfect asset to use as a buffer against rising inflation.
History has shown that despite economic turmoil, gold remains stable and holds its value. For example, since the start of the GFC, it has risen in value by over 100%!
Due to its performance in times of economic uncertainty, gold is an obvious choice for those wanting to provide some additional protection for their retirement funds.
This characteristic of the metal has been highlighted in recent years where despite the ravages of recession and inflation, gold has followed a mainly upward trend. This is in stark contrast to the downward trend experienced by many other investments like stocks and annuities.
The other benefit of gold is that it is influenced by completely different factors than those that affect stocks. Generally, when stocks are on an upward trend, it will normally trend down, illustrating that it can be a useful hedge against the movement of not only stocks but also the US dollar.
So, Is an IRA Backed By Precious Metals The Right Choice For You?
If you’re looking for a way to stop inflation eating away at the value of your investments, then a precious metal backed IRA is a great choice. Remember that most other assets are inherently less stable – paper money is government controlled and assets like stocks and bonds are digital assets. The values of these assets can rise and fall dramatically as a result of economic collapse or government intervention.
The simple fact is…Gold is a unique asset. It is physical, cannot be manufactured and is limited in supply.
On the other hand, IRAs that are backed by traditional assets like stocks and bonds are sensitive to the value of the US dollar and as a result of the quantitative easing measures enacted by the US government, the value of these IRAs have steadily fallen over the past few years. IRAs backed by precious metals, by their nature, are unaffected by the US dollar and have risen in value over the same time period.
In summary, these are the top 5 reasons why you should choose an IRA backed by physical gold:
- Gold’s value is unaffected by government monetary stimulus measures;
- It is an extremely durable and valuable form of currency;
- It’s value rises in times of economic and political uncertainty;
- It can be invested in as physical metal like bars and coins, and as paper assets like mining stocks, gold EFTs and certificates of deposits.
- It holds its value as it is a finite resource and cannot be manufactured
In today’s uncertain economic times, investors are more worried than ever about protecting their investments and as a result are turning to gold-backed IRAs as a recession proof asset. If you would like to find a reputable gold ira specialist tailored to your unique circumstances, feel free to have a quick chat on our homepage at EasyGoldIRA.com. You’ll be able to find a highly rated Gold IRA provider that fits your needs and can quickly and easily walk you through the process.