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The Simple Dollar’s Picks for Best IRA Account in 2016

By on November 1, 2016

This article was originally featured on The Simple Dollar

The best IRA Account for each individual will vary based on a host of factors as well as personal tastes, which is why we highlighted several different companies in this post.

Here are the 6 best IRA account options for 2016:

  1. Best Overall: E*TRADE
  2. Best for Experienced Traders: TD Ameritrade
  3. Best for Beginners: Scottrade
  4. Best for long-view investors: Betterment
  5. Best for long-view investors: Wealthfront
  6. Cheapest option: TradeKing

What Makes These the Best IRA Companies?

Here are some more of the common features of these top companies:

  • Access to a variety of investment products
  • Several types of IRA accounts
  • Introductory deals on rollovers or new accounts
  • Access to quality support, research, and education

IRA 101

What is an IRA?

An IRA, or Individual Retirement Account, is basically a savings account that has a lot of guidelines and restrictions. It’s the best way to invest your money to get upfront tax breaks or pay no taxes on your gains when you take your money out later in life.
While you do enjoy these tax breaks, you’ll incur a heavy tax penalty if you withdraw any funds from an IRA account before you’re 59.5 years old. The 4 most common types of IRAs:

  • SEP IRA — Also known as the Simplified Employee Pension Individual Retirement Account, this IRA allows an employer to contribute to your Traditional IRA. So instead of your employer adding money into a pension fund, it goes into your IRA as if you were investing it yourself.
  • SIMPLE IRA — This stands for Savings Incentive Match Plan for Employees and it’s set up very similar to a 401K plan, meaning the employer matches the contributions made by the employee.
  • Traditional IRA
  • Roth IRA

Roth vs Traditional IRA

A Roth IRA and a Traditional IRA have many of the same rules and regulations, but there are a few key differences between the two.

Traditional and Roth IRA Rules

The rules that Traditional and Roth IRAs have in common are:

  • Contribution Limits — In 2016, you can put in $5,500 per year if you are 49 years old or younger and $6,500 if you’re between 50 and 70.5 years old in both Traditional and Roth IRA. If you’re 40 years old, you can put $3,000 into a Roth IRA and $2,500 into a Traditional IRA.
  • Withdrawal Penalties — Regardless of which type of IRA account you choose, you’ll have to pay a 10% penalty in addition to any income tax earned on the investment if you pull your money out early.
  • Funding an Account — You can fund your Roth IRA or Traditional IRA with cash or cash equivalents but not other assets.
  • Choosing Investments — For both Traditional and Roth, you put your money in and then allocate it to specific types of investments, like stocks, bonds, mutual funds, ETFs, and more.

The Key Differences Between a Roth and Traditional IRA

  • Tax Deductions — With a Traditional IRA, you’re allowed to deduct your yearly contribution off your taxable income each year. When you withdraw your money from a Traditional IRA, it will be taxed as income, like any other investment. A Roth IRA is not tax deductible each year, but you don’t have to pay income tax when you withdraw the money from your account at retirement.
  • Income Limitations — Traditional IRAs allow anyone younger than 70.5 years old to contribute regardless of income. In order to contribute to a Roth IRA, a single filer must make less than $129,000 and married couples must make less than $191,000 combined.
  • Old-Age Restrictions — You can keep your money in a Roth IRA as long as you want, but a Traditional IRA forces you to start taking distributions at age 70.5. A Roth IRA also requires that you have the account open for at least five years before qualifying for a distribution
  • Withdrawal Exceptions — If you withdraw from your Roth IRA early, you’re only hit with a tax on the gains, not the money you put into the account.

Who is a Roth IRA Best For?

  • Younger adults without large incomes
  • Those who want flexibility to take out investments

Who is a Traditional IRA Best For?

  • People who want to reduce their taxable income each year
  • Adults who start an IRA account later in life.

Invest in Your Financial Future

It’s never too late to get started by opening a Roth IRA or Traditional IRA with one of the companies mentioned above. Even if you don’t have thousands of dollars each year to invest, anything you can get into an IRA account will pay off down the road. The money has the ability to compound year after year and grow into something very significant.
We’ve all seen that no investment is a guarantee to make you money over time. However, you’ll at least have the opportunity to let your money grow and avoid paying taxes when you invest or when you take it out (depending on whether you choose a Roth IRA or Traditional IRA).

For more information on IRA Accounts, including the pros and cons of each top pick, read the full article here: http://www.thesimpledollar.com/best-ira-accounts/

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