7 types of IRAs: Which is right for you?

Individual retirement accounts (IRAs) come with tax benefits that can help you grow your wealth, and millions of Americans own at least one. Recent data from the Investment Company Institute (ICI) shows that more than 40% of US households owned IRAs as recently as mid-2022.

Originally designed to give workers without an employer-sponsored retirement plan a way to get tax benefits to save for retirement, IRAs are now available to all workers and even businesses.

So, what are the different types of IRAs, and which is right for you?

Types of IRAs at a glance

• IRAs are a type of investment account that give you tax incentives to save for retirement.
• IRAs come in many types, but the most popular are the traditional IRA and the Roth IRA.
• You can open an IRA at most major banks or brokerage firms.

What is an IRA?

An individual retirement account (IRA) is a type of investment account that offers tax benefits for saving for retirement. They’re accessible — most major banks and brokerage firms offer IRAs, anyone with earned income can open one and they’re incredibly straightforward to set up. IRAs are also versatile retirement accounts in that they let you invest in a wide range of assets. Compare an IRA to a 401(k), which typically only lets you invest in various mutual funds.

IRAs come in many types. The traditional IRA, the first IRA type introduced in 1974, lets you deduct your contributions each year. There are employer-sponsored IRAs for business owners, IRAs for nonworking spouses and IRAs that let you invest in just about any type of asset — from stocks to precious metals to equity for startup companies and just about everything in between.

7 types of IRAs

1. Traditional IRA

The traditional IRA is the original individual retirement account and remains the most popular IRA type among Americans. According to recent data from the Investment Company Institute (ICI), 31.2% (40.9 million) of US households own a traditional IRA.

With their tax-deductible contributions and the money inside the account growing tax-deferred, traditional IRAs offer investors a way to cut their taxable income, raise the potential for compounding and potentially save on taxes over the long term. And, unlike the Roth IRA, traditional IRAs have no income limits. Meaning, you can own and fund a traditional IRA no matter how high your income. Traditional IRA features include:

• A 2023 contribution limit of up to $6,500 ($7,500 if you’re age 50 or older).
• Deductible contributions, depending on your modified adjusted gross income (MAGI), filing status and whether you’re covered by a retirement plan at work.
• Investment earnings grow tax-deferred so long as they’re kept in the account.
• A 10% penalty applies if you withdraw either contributions or earnings before you’re age 59 and a half.
• Withdrawals of contributions and earnings are taxed in retirement at your then-current tax rate.
• You can’t keep your money in a traditional IRA indefinitely. Withdrawals are required starting at age 72 (73 if you reach age 72 after December 31, 2022).
• Best for individuals who think they’ll be in a lower income tax bracket in retirement and want an immediate tax break for their contributions or those who don’t qualify for a Roth IRA.

Dive deeper: What is a traditional IRA? How it works and how to open an account

2. Roth IRA

The Roth IRA is the second-most popular IRA type in the US, and it’s one of the best investment accounts for growing tax-free wealth. According to ICI data, almost a quarter (32.3 million) of US households owned a Roth IRA as of mid-2022.

Retirement savers who contribute to a Roth IRA set themselves up for tax-free withdrawals in retirement, with no mandatory age-based withdrawals. Though you can’t deduct your contributions, your money grows and is available tax-free when you begin taking withdrawals in retirement. But you need to meet certain income eligibility requirements to fund a Roth IRA and wait at least five years from your first Roth contribution to access your funds without taxes. Roth IRA features include:

• A 2023 contribution limit of up to $6,500 ($7,500 if you’re age 50 or older).
• Tax-free earnings growth and tax-free withdrawals in retirement.
• Income limits determine Roth IRA contribution eligibility.
• Since you’ve already paid taxes on them, withdraw your contributions at any time, tax- and penalty-free.
• You must wait at least five years from your first Roth IRA contribution to withdraw earnings tax-free, even if you’re over the age of 59 and a half.
• A 10% early-withdrawal penalty applies only to the earnings portion of your account if you’re under age 59 and a half. You’ve already paid taxes on your contributions, so you can withdraw this money at any time.
• Best for those who think they’ll be in a higher income tax bracket in retirement or those who may need to dip in to their contributions early.

Dive deeper: What is a Roth IRA? How it works and how to open an account

3. SEP IRA

A simplified employee pension (SEP) IRA is a type of traditional IRA employers can set up and fund on behalf of their employees. Though they’re available to businesses of any size, these accounts are typically used by small businesses or self-employed individuals who want to offer a retirement plan option to employees but don’t want the added costs typically associated with a 401(k).

Employers can contribute up to the lesser of $66,000 or 25% of the employees’ compensation each year, and their contributions are deductible. SEP IRA features include:

• A 2023 contribution limit of up to the lesser of $66,000 or 25% of the employee’s pay.
• Employers don’t have to contribute to the SEP IRA each year, but if they do, they must provide a contribution to all eligible employees.
• Only employers contribute to a SEP IRA, and employers can deduct contributions each year. Employees cannot make elective salary deferrals or catch-up contributions.
• Employees are 100% vested in the money, and employer contributions don’t affect the amount an individual can contribute to a Roth or traditional IRA.
• Eligible employees must be at least 21 years old, have received at least $750 in compensation for 2023 and have worked for the employer in at least 3 of the last 5 years.
• The same minimum age for IRA withdrawals applies (59 and a half).
• Best for small businesses that want to avoid the startup and ongoing costs of a conventional retirement plan.

4. SIMPLE IRA

The savings incentive match plan for employees (SIMPLE) IRA is a type of traditional IRA that lets both employers and employees save for the employee’s retirement — similar to a 401(k). Unlike the SEP IRA, employees can contribute through salary deferrals, and employers are required to kick in some money too.

Employers put up money through either matching contributions or nonelective contributions. Nonelective contributions are money employers chip in even if the worker doesn’t save anything. SIMPLE IRA features include:

• Only available to small-business owners with no other retirement plan and 100 or fewer employees who received at least $5,000 in compensation the year prior.
• Employees can contribute up to $15,500 for 2023 ($19,000 if you’re age 50 or older) and are always 100% vested. If they participate in a 401(k) at another job during the year, their SIMPLE IRA contribution counts toward the overall salary deferral annual limit of $22,500 for 2023.
• Catch-up contributions are allowed, up to $3,500 in 2023.
• Employers can offer either dollar-for-dollar matching contributions or nonelective contributions. Matching contributions can be up to 3% (but not lower than 1%) of the employee’s compensation. If the employer chooses nonelective contributions, they must kick in 2% of compensation on behalf of each eligible employee, even if the employee doesn’t contribute.
• Employers can deduct contributions they make to the plan for their employees.
• Best for small businesses with 100 or fewer employees.

5. Spousal IRA

The spousal IRA lets individuals without taxable income contribute to an IRA, so long as their spouse has earned income for the year and they file a joint tax return. Each spouse can contribute up to the 2023 limit of $6,500, but the total combined contributions can’t be more than the taxable compensation reported on their joint return.

Come tax time, contributions are fully deductible if neither spouse participated in a retirement plan at work. Spousal IRA features include:

• Each spouse can contribute up to $6,500 in 2023 ($7,500 if you’re age 50 or older). Combined contributions can’t be more than the taxable compensation reported come tax season.
• Deductible contributions are reduced or unavailable if either spouse has a retirement plan at work.
• Best for married couples filing jointly where one spouse doesn’t have taxable income.

6. Backdoor Roth IRA

Moreso a maneuver than a separate IRA, a backdoor Roth IRA lets individuals who aren’t eligible to contribute to a Roth IRA directly still make Roth IRA contributions. Also known as a Roth conversion, this strategy involves funding a traditional IRA and converting the account to a Roth IRA, bypassing the income limits imposed on Roth contributions.

But the conversion is permanent, and Uncle Sam will want its share of taxes come tax season (you pay taxes on any untaxed amounts in your traditional IRA that you convert). Backdoor Roth IRA features include:

• The ability to fund a Roth IRA even if you’re ineligible based on your income.
• Roth conversions are permanent.
• You’ll need to pay taxes on any untaxed amounts you convert from your traditional IRA.
• Best for people who earn too much to contribute to a Roth IRA directly but want tax-free withdrawals in retirement.

7. Self-directed IRA

A self-directed IRA (SDIRA) is a type of IRA that lets you invest in a wider range of assets than what banks or brokers typically allow through a regular IRA. Available in either the traditional, Roth, SEP or SIMPLE IRA type, self-directed IRAs let you invest in everything from stocks, bonds and exchange-traded funds (ETFs) to alternative assets such as cryptocurrency, real estate and gold. Maybe you’ve seen one of those gold IRA commercials before? Yep, that’s a self-directed IRA.

But these accounts can be pricey to open and maintain and are prone to fraud because of the lack of regulatory protection. Self-directed IRA features include:

• The same contribution limits that apply to the regular versions of the accounts (traditional, Roth, SEP and SIMPLE) still apply. In 2023, you can contribute up to $6,500 total to your traditional and/or Roth IRA ($7,500 if age 50 or older). For a SEP IRA, an employer can contribute up to either $66,000 or 25% of an employee’s yearly compensation. Meanwhile, an employee can contribute up to $15,500 per year to a SIMPLE IRA.
• Because SDIRAs can be complicated and alternative assets carry more risk and regulatory requirements, most brokerages that offer standard IRAs do not offer SDIRAs.
• The minimum age for withdrawals from a self-directed IRA is still 59 and a half.
• SDIRAs can include higher fees than what you may typically find with a regular IRA. For example, a self-directed gold IRA typically includes an account setup fee, custodial fees and transaction fees.
• Best for retirement savers who want maximum flexibility in terms of investment options.

One in three have an IRA

Do you have an IRA?

If you’re planning to open an IRA, you’ll be joining approximately a third (31%) of American adults who have an open account.

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Bottom line

IRAs come in many types, each with its own purpose, benefits and drawbacks. Choosing the right IRA depends on your personal situation, tax strategy and investment goals. But the best IRAs of 2024 and best Roth IRAs in 2024 are those that offer the most investment options, fewest fees and greatest selection of trading tools and educational resources.

Frequently asked questions about the types of IRAs

• How many types of IRA are there?

  The four main types are the traditional, Roth, SEP and SIMPLE IRAs.

• Which type of IRA is best?

  Which type of IRA is best depends on your specific situation. If you want immediate tax benefits, think you'll be in a lower tax bracket in retirement and qualify for a deduction, a traditional IRA might be best. If you expect to be in a higher income tax bracket in retirement and want tax-free withdrawals, a Roth IRA may be more appropriate. If you're an employer, you might consider a SIMPLE or SEP IRA.

• Which is better: Roth IRA or traditional IRA?

  Whether a Roth IRA or traditional IRA is better depends on which account type can be most beneficial to you. If you want tax-free withdrawals in retirement, a Roth IRA would be better. If you want to claim a deduction for your contributions, a traditional IRA may be most appropriate.

• What are the two most popular types of IRA?

  The two most popular types of IRAs are the traditional IRA and the Roth IRA. According to the ICI, 31% (41.9 million) of US households owned a traditional IRA as of mid-2022, while almost 25% (32.3 million) owned a Roth IRA.