An Individual Retirement Account (IRA) is a personal savings account into which you set aside money for your retirement. You may be able to defer taxes on the money you set aside, depending on the type of plan you have.

IRAs carry certain tax implications for businesses and individuals. From an employee standpoint, it is important to remember that a qualified plan allows contributions to grow tax-deferred. That means you will not pay taxes on any of the contributions until you receive a distribution. Distributions are generally subject to ordinary income tax, and there may be an additional 10 percent tax penalty if a distribution is taken before age 59½. If you are under age 70½ and have earned taxable income, you may be eligible to contribute to an IRA. There are many different types of IRAs, including Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

Traditional IRAs
A Traditional IRA is one in which you make annual contributions and/or rollover contributions. Annual contributions may be tax-deductible if you and your spouse are not participants in an employer-sponsored retirement plan or your income is below certain threshholds. Income tax for rollover contributions is deferred. Compare Traditional vs. Roth IRAs for a detailed outline of Traditional IRA features to help you decide which may be the better retirement savings vehicle for you.

Roth IRAs
A Roth IRA is one in which you make annual contributions and/or rollover contributions. Certain income limits apply. Annual contributions are not tax deductible, and gains on rollovers from other qualified plans are taxable. Qualified distributions are not subject to federal income tax on withdrawal. Visit Traditional vs. Roth IRAs to read a detailed summary of Roth IRA features to help you decide which may be the better retirement savings vehicle for you.

A Simplified Employee Pension (SEP) IRA is one under which your employer makes contributions to an IRA established and maintained for each eligible employee of a business. All employers are eligible to establish this type of plan.

A SEP IRA makes saving for retirement easy because your employer is making the contributions. Each year you're eligible, a contribution is made on your behalf to an IRA that you own. All contributions to the plan are vested, which means they're yours, even if you leave your current employer before retirement.

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is one under which eligible employees may make deferrals to SIMPLE IRAs through salary reduction agreements. Employer contributions are required. Only employers with 100 eligible employees or fewer (and no other qualified plan) may establish a SIMPLE IRA.

The amount you contribute to your SIMPLE IRA comes out before taxes – which means you have more to contribute than if you waited to invest after taxes are deducted. Plus, your money grows tax-deferred, so you don't pay taxes on your contributions or earned interest until you begin making withdrawals.

Contributing Can Be Easy
Have you ever noticed that despite all your good intentions, sometimes there's just not enough left to contribute to your retirement at the end of the month? A SIMPLE IRA makes it easy to pay yourself first. You just authorize a percentage to be deducted from your pay before taxes, which also lowers your current taxable income. IRS annual limits apply.

On top of your contributions, federal law requires your employer to make a contribution to your plan each year in one of two ways:

  • 3% Matching Contribution – Your contributions are matched dollar-for-dollar up to 3% of your total compensation.

    For example, suppose you earn $20,000 a year and put $800 (4%) into your SIMPLE IRA. The company would put in an additional $600, which is 100% of your contributions up to 3% of your compensation.

    The company may reduce the matching contribution to no less than 1% in any two out of five years, ending with the current year.

  • 2% of Compensation Contribution – Your employer would contribute 2% to you and all other eligible employees who have earned at least $5,000 for the year regardless of whether or not they are contributing any of their own money.

All contributions to your SIMPLE IRA (your and your employer’s) are vested, which means they’re yours, even if you leave your current employer.

Note: We do not provide logal or tax advice and the above information is not intended or written to be used as such. It was written solely to support the sale of annuity products. As a taxpayer, you cannot use it for the purposes of avoiding penalties that may be imposed under the tax laws. You should seek advice on legal or tax questions based on your particular circumstances from an independent attorney or tax advisor.

Print this page

Traditional vs. Roth IRAs