What Is The Best IRA For You?

Saving for retirement has always been an unwavering cornerstone for most American families. For the longest time, employer-backed 401Ks formed the backbone of that process. However, recent data suggest that younger Americans - and their companies - are moving away from this savings instrument. 

This begs the question - “If modern companies are moving away from 401Ks, how do I save for retirement?” 

The answer is simple - all you have to do is invest in an IRA instead. 

In this article, we’ll cover:

  • What is An IRA?
  • What Are The Different Types Of IRAs?
  • What Is The Best IRA For You?

What Is An IRA?

An IRA (individual retirement account) is a tax-advantaged savings instrument designed to help people save for retirement. 

While most 401Ks are employer-backed (which necessitates the need for a company sponsorship), an IRA can be opened and operated by yourself. However, there are a few employer-backed IRAs that provide companies with a useful 401K alternative for their needs. 

Different Types Of IRAs

As with most savings instruments, you have a number of options to choose from when it comes to the type of IRA you invest in. Here’s a closer look at each one:

1. Traditional IRA

The traditional IRA is the oldest and most popular IRA choice today. The key features of such an account include:

  • Annual contributions of up to $6000 in 2019.
  • An extra $1000 catch-up contribution if the investor is above 50 years of age.
  • All contributions are tax-deductible.
  • All withdrawals made at retirement to be taxed at the rate of your tax bracket.

Best For:

Due to the unique nature of taxability here, traditional IRAs are an ideal option for investors who are in a higher tax bracket now than they will be when they retire. 

As contributions are tax-free, the tax-savings made here will outweigh the taxes paid on withdrawals when they’re part of a lower tax bracket. 

2. Roth IRA

A Roth IRA is a good alternative for investors who won’t benefit from the traditional IRA format. While the annual contribution limits remain the same here, you’ll need to be part of a particular income bracket to qualify for a Roth IRA:

  • Income less than $137,000 annually for single filers.
  • Income less than $203,00 annually for married couples applying jointly.

The chief difference between Traditional and Roth IRAs are that with Roth IRAs:

  • All contributions are taxable.
  • All withdrawals made in retirement are penalty and tax-free.

Best For:

Roth IRAs make sense for people who’ll be in a higher tax bracket post-retirement than where they are right now.

3. SEP IRA

SEP (simplified employee pension) IRAs are set up by employers for their employees. Here are some of its considerations -

  • As this is an employer-backed IRA, contribution limits here far exceed those present in traditional IRA methods. The current annual limit for each employee is either 25% of their salary or $56,000 (whichever is lesser).
  • Employers must contribute annually (on a salary percentage basis) to every employee account. However, the overall size of the contribution can vary depending on the company’s cash flow.
  • Employees cannot contribute to this plan via salary deferral - they have to be employed by the current employer for at least three of the last five years and must have earned at least $600 in the year to qualify.

Best For:

Small business owners who’d like to avoid the operational costs of a traditional 401K retirement plan. It’s also a good way for them to get a hefty tax-deduction on all contributions made for their employees.

4. SIMPLE IRA

SIMPLE (Savings Incentive Match Plan for Employees) IRAs are the closest you can get to a typical employer-sponsored 401k. 

  • The annual contribution limit is $13,000 with an extra catch-up contribution of up to $3000 if you’re older than 50 years.
  • Employers are expected to match (invest) up to 3% of each employee’s contribution or adhere to a fixed 2% rate for each employee’s compensation.
  • Employees must have earned at least $5000 over any two years prior to the current year to qualify for a SIMPLE IRA. They must also be expected to earn at least $5000 during the current year.

Best For:

Companies with under 100 employees. Working with a typical 401k or a SEP IRA may be unfeasible for these parties. 

5. Self-Directed IRAs

Self-Directed IRAs can adhere to either traditional or Roth IRA eligibility and contribution rules. The only difference here is the freedom given to the investor when it comes to where they choose or want to invest in. 

  • Unlike most other IRAs that only allow you to invest in traditional assets such as bonds and stocks, self-directed IRA holders can invest in alternative assets. These could be horses, wine, luxury cars, or real estate. You could also directly invest in a local business like your neighborhood florist or pizzeria using an IRA custodian - it’s up to you. 
  • In most cases, you need to be an accredited investor to invest in alternative assets, however, non-accredited investors can invest in certain kinds of alternative assets with some restrictions.
  • You must have a trustee or custodian in place to set up a self-directed IRA account. The IRS requires that you have a custodian for your IRA, regardless of whether you use the IRA to invest in alternative or publicly-traded assets. A custodian holds title to your assets for your benefit and is responsible for IRS reporting. 

Best For:

Investors who are looking to diversify their retirement portfolio while taking advantage of market irregularities and a lack of competition. Alternative investments are also a good option for investors who are looking at long-term goals as opposed to short-term returns. 

What Is The Best IRA For You?

Here are a few leading IRA providers. Read on to find the best one for your unique set of needs. 

1) Best For Self-Directed Investments: Alto

Alto is the perfect custodian for your self-directed IRA. It allows you to diversify your portfolio by directly investing in startups, real estate and more through partner investment platforms like AngelList, YieldStreet, Groundfloor and more. Alto also allows you to invest in opportunities not present in their partner platforms. As it’s 100% online, you’ll be able to start investing right away. 

2) Best For Beginners: TD Ameritrade

TD Ameritrade offers first-time IRA investors with all they need to quickly build their investment portfolio. With multiple educational resources, a range of account options and no monthly or annual fees, TD Ameritrade is perfect for beginners.

3) Best For Low-Cost Investments: Vanguard

Vanguard is well-known for their low-cost traditional instruments like mutual funds and ETFs where you can invest using your IRA. There are no transaction fees over these investments which can help you save money in the long run. The downside is that diversifying into non-Vanguard funds is not possible. 

4) Best Robo-Advisor: Betterment

Robo-advisors are asset managers who allocate your funds into one of several pre-built portfolios that aligns with your needs. All you have to do is give them your money and they’ll do the rest. Betterment is one of the most reputed and well-known robo-advisors in the industry. 

5) Best Overall: Fidelity

Fidelity is the best overall IRA account provider because it covers all your IRA needs:

  • Offers you multiple accounts and investment options
  • Has educational resources and reports
  • No minimum and recurring account fees
  • Allows you to invest in non-Fidelity funds

Start diversifying your retirement portfolio today.

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