The Traditional IRA and the Roth IRA offer ways to save for retirement, although each offers different benefits and advantages.

The Traditional IRA allows an individual with earned income to take a tax deduction for dollars contributed (if income falls below a certain threshold), and the growth in the account is tax deferred. When distributions are taken from a Traditional IRA, they are taxed as ordinary income. If one chooses not to take distributions from an IRA after reaching 59½, the IRS will force distributions to be taken at age 70½. These are known as required minimum distributions (RMDs) and are based on the presumable retiree’s life expectancy.

The Roth IRA was established as an account into which after-tax dollars are invested. While the Roth gives no tax deduction on the front end, the growth—and eventual distribution—is federal tax-free. The Roth IRA allows one to take out 100% of contributions at any time for any reason with no taxes or penalties. It is only the growth on which one must wait until the age of 59½ to draw penalty-free. There is also a 5-year aging period, which means that a payment made from a Roth IRA account is considered a qualified distribution if it is made after a 5-year period, beginning with the first taxable year after which a contribution to the Roth IRA occurs.

• Traditional and Roth IRAs: The annual contribution limit for traditional and Roth IRAs is $6,000 total across both account types for those under the age of 50 and $7,000 for people 50 and over. Tax deductions for traditional IRA contributions begin to phase out at certain income levels if you or your spouse has a workplace retirement plan. You’ll lose your deduction entirely once your income is too high, but you can still make nondeductible contributions. The amount you can contribute to a Roth IRA declines once your income hits a certain threshold, and you can’t contribute at all once your income hits $137,000 if filing singly, $203,000 if married filing jointly, or $10,000 if married filing separately.
• SEP IRAs: The annual contribution limit for a SEP IRA is 25% of up to $280,000 in compensation or 25% of net self-employment earnings (self-employment income minus SEP contributions and 1/2 of self-employment tax). Only employers can make contributions (you’re counted as an employer if you run your own business). The total maximum annual contribution is $56,000.
• SIMPLE IRAs: The annual contribution limit is $13,000 for a SIMPLE IRA or $16,000 if you’re over 50. Employers can contribute 2% of compensation or can match contributions you make up to a maximum of 3% of compensation. You can open a SIMPLE IRA if you are self-employed or run your own business and can contribute as both employee and employer.