Most people are aware of the traditional and Roth IRAs since they’re the most popular and most accessible retirement plan out there. Any individual with earned income can make contributions to a traditional or Roth IRA at any age. While the Roth IRA does come with income limits, there’s still an easy workaround, called the backdoor Roth IRA, that allows all income levels to put money into their Roth IRA each year.
While lesser known than the traditional and Roth IRA, there are actually 5 other types of individual retirement accounts. In this article, we’ll look at all the different types of IRAs available, and compare their limits, rules, and eligibility.
What are the different types of IRAs?
Before we deep dive into each IRA, let’s go through a quick overview of the different types of IRAs available to individuals and business owners.
- Traditional IRA – For individuals. Contribute up to $6,500 in pre-tax income for 2023.
- Roth IRA – For individuals. Contribute up to $6,500 in post-tax income for 2023.
- SEP IRA – For business owners. Contribute up to $66,000 in pre-tax income for 2023.
- SIMPLE IRA – For business owners. Contribute up to $15,500 in pre-tax income for 2023
- Non-deductible IRA – For individuals who don’t qualify for an IRA. Contribute up to $6,500 in post-tax income for 2023. You won’t get a tax deduction for your contribution, but growth will be tax-deferred until retirement.
- Spousal IRA – For couples filing taxes jointly, even if one partner doesn’t earn income, they can use the other partner’s income to make contributions into their own IRAs.
- Self-directed IRA – A special type of IRA that lets you invest in alternative assets.
- Custodial IRA – A traditional or Roth IRA that’s set up for minors by a custodian.
- Rollover IRA – A traditional or Roth IRA that’s specifically created to receive funds from an employer-sponsored retirement plan.
Own a business? Here’s a list of all retirement account options for business owners.
Traditional and Roth IRA
While anyone with earned income can make contributions to an IRA, the Roth IRA has income limits that restrict high income earners from making contributions. If your income is over $153,000 you cannot contribute. The only option is to do a backdoor Roth IRA.
A traditional IRA doesn’t prevent high income earners from making contributions, but you’ll get no tax deductions on your contribution if your income is over $83,000.
Learn more about the traditional and Roth IRA income limits here.
The contribution limit for 2023 is $6,500 if you’re under 50 years of age, and $7,500 if you’re aged 50+. The contribution limits between the traditional and Roth IRA are aggregated each year. For example, if you’re under 50 years old and contribute $5,000 to your Roth IRA, you can only contribute $1,500 more to your traditional IRA.
The investment options of a traditional and Roth IRA are generally limited to traditional assets like stocks, bonds, mutual funds, and ETFs.
Withdrawals from your traditional IRA are taxed as regular income, while withdrawals from your Roth IRA are tax-free.
With a traditional IRA, you can start taking withdrawals at the age of 59½. Any earlier withdrawals get hit with a 10% penalty plus income taxes on the amount withdrawn.
With a Roth IRA, you can withdraw your contributions at any time without penalties or taxes. However, you can only withdraw earnings from your account after your Roth IRA is at least 5 years old, and you’re at least 59½ years old.
A SEP IRA works similarly to a traditional IRA, but it’s designed for business owners with or without employees. It comes with a much higher contribution limit and some additional rules on contributions if you have eligible employees who work in your business.
Any business owner with or without employees can contribute to a SEP IRA. If you have eligible employees, you must also make equal contributions to every employee’s SEP IRA. For example, if you contribute 20% of your compensation into your SEP IRA, you must also contribute 20% of every eligible employee’s compensation into their SEP IRAs.
What counts as an eligible employee? An eligible employee is any employee who is over 21 years of age, worked at the company for at least 3 out of the last 5 years, and earned at least $650 for 2022 and $750 for 2023.
The SEP IRA contribution limit for 2023 is $66,000. There are no catch-up contributions.
The investment options of a SEP IRA are the same as a traditional IRA. You can invest in traditional assets like stocks, bonds, mutual funds, and ETFs.
Similar to a traditional IRA, you can start taking distributions when you reach the age of 59½. Any earlier withdrawals are hit with a 10% penalty plus income taxes on the amount withdrawn. Because you contribute to a SEP IRA with pre-tax income, your qualified withdrawals in retirement are taxed as regular income.
Employees who receive SEP IRA contributions from their employer at work have full ownership and control over their SEP IRAs. All contributions made into their accounts are always immediately 100% vested.
The SIMPLE IRA is another IRA designed for business owners. Unlike the SEP IRA, you can only have a SIMPLE IRA with under a 100 employees, and employees can make contributions into their own accounts (although the limits are much smaller than the SEP IRA).
Unlike other business retirement plans like the SEP IRA and solo 401k, which provide more benefits for the business owner, a SIMPLE IRA is mainly set up with the intention of offering a retirement plan for employees of a business. Employees can contribute to their plans using pre-tax dollars, and employers are required to make mandatory contributions for each eligible employee.
Employers: Any business owner with fewer than 100 employees can set up a SIMPLE IRA. The business must not have any other retirement plans like a SEP IRA, solo 401k, or 401k. If the business grows to over 100 employees, the SIMPLE IRA can remain open for at least two years. If after two years, the business still has over 100 employees, the business is no longer eligible for a SIMPLE IRA.
Employees: Any employee who made at least $5,000 in compensation in any of the two previous years and are expected to make at $5,000 in the current year are eligible to receive employer contributions to their SIMPLE IRA. Employers can also choose to reduce or eliminate the $5,000 requirement.
For 2023, the SIMPLE IRA contribution is $15,500 if you’re under 50 years of age, and $19,000 if you’re aged 50+.
The investment options of a SIMPLE IRA are limited to traditional assets like stocks, bonds, mutual funds, and ETFs.
The withdrawal rules are the same as a traditional or SEP IRA. You can start taking distributions when you reach the age of 59½. Earlier withdrawals are penalized 10% plus income taxes.
A non-deductible IRA is a type of traditional IRA in which contributions are made with after-tax dollars, meaning the contributions are not tax-deductible. Its primary purpose is to provide a way for individuals to save for retirement when they are not eligible for tax-deductible contributions due to income limits or participation in an employer-sponsored retirement plan.
The contribution limits for a non-deductible IRA are the same as the traditional and Roth IRA. For 2023, you can contribute up to $6,500 if you’re under 50 years old, or $7,500 if you’re aged 50+.
As the name suggests, contributions to a non-deductible IRA are made with post-tax income and you get no tax deductions. However, you still receive tax-deferred growth, meaning you don’t pay taxes on the investment gains until you start taking distributions in retirement.
The investment options are the same as traditional and Roth IRAs. You can invest your funds in traditional assets like stocks, bonds, and mutual funds.
Like other IRAs you can start taking distributions once you reach the age of 59½. When you take qualified withdrawals, only earnings in your account get taxed as regular income. The contributions portion of your account can be withdrawn tax-free since you contributed with post-tax income.
The next type of IRA is the spousal IRA, which is established to help non-working or lower-earning spouses to help save for their retirement. The purpose of a spousal IRA is to allow couples to maximize their retirement savings even when one spouse has little or no earned income.
With regular IRAs, you’re required to have earned income during the tax year in order to make contributions. With a spousal IRA, even if you don’t make any earned income, you can still make contributions into your own IRA using your spouse’s income.
To qualify for a spousal IRA…
- The couple must be married and file a joint federal income tax return.
- The working spouse must have earned income that meets or exceeds the total amount of contributions made to both the working spouse’s IRA and the spousal IRA.
The spousal IRA is owned and managed by the non-working or lower-earning spouse, allowing them to build retirement savings in their name. The contributions to a spousal IRA are subject to the same tax rules, deduction limits, investment options, and withdrawal rules as a regular IRA, depending on whether it is a traditional IRA or a Roth IRA.
The next type of IRA is the self-directed IRA. Any IRA can be self-directed, but the most common self-directed IRAs are the traditional and Roth IRAs. For example, you could open a self-directed SEP IRA, SIMPLE IRA, traditional IRA, or Roth IRA. It has the same eligibility rules, withdrawal rules, and contribution limits as regular IRAs, the only difference being more investment options. With regular IRAs that are not self-directed, you can only invest in traditional assets like stocks, bonds, mutual funds, and ETFs. The self-directed IRA is simply a special type of IRA that lets you invest in alternative assets.
What type of alternative assets can you invest in?
The most common investments with a self-directed IRA are precious metals like gold and silver, cryptocurrencies and NFTs, real estate, and private equity and angel investing. Most self-directed IRAs specialize in one specific asset class, so it’s normal to have several different IRAs if you decide to invest in alternative assets. Just remember that IRA contribution limits are aggregated between all your accounts in order to avoid overcontributing.
The last type of IRA is the custodial IRA, which is basically the same thing as a traditional or Roth IRA for minors established a custodian, who is usually a parent, guardian, or another responsible adult. Any minor can make contributions to custodial IRA as long as they have earned income during the tax year.
The custodian, which is usually the parent or guardian of the child, manages the account on behalf of the minor until the minor reaches the age of majority (usually 18 or 21, depending on the state). The custodian is responsible for making all investment decisions in the account until the child reaches majority age. Once the child reaches the age of majority, and the account’s control is transferred to them, they are free to do whatever they like with the account. The custodian has no power over the account at this point.
Contribution limits, withdrawal rules, and investment options are the exact same as a traditional or Roth IRA. The only difference is that the custodian manages the account until the child reaches the age of majority.
When you leave your employer, you have three options for what to do with the funds in your 401k or 403b. You can take a withdrawal, leave the funds in your old 401k (if your employer lets you), or rollover the assets into a new retirement plan.
A rollover IRA is basically a traditional or Roth IRA that’s specifically created to receive a rollover of assets from your old employer-sponsored retirement plan. The investment options, rules, limits, and tax implications are the same as a regular IRA, but having the rolled over funds go into a designated rollover IRA allows for easier record-keeping, and could make it smoother to rollover the funds to a new employer plan in the future.
Frequently asked questions about IRAs
Which IRA is the easiest to get?
The IRA that’s easiest to get is the traditional and Roth IRAs. Anyone with earned income can open and make contributions to an IRA (as long as they don’t exceed the Roth IRA income limits). There are no age limits so even minors can start contributing at an early age through a custodial IRA.
Which IRAs are for business owners?
The SEP IRA and SIMPLE IRA are for business owners. The SEP IRA can be opened with or without employees, while the SIMPLE IRA can only be opened if you have fewer than 100 employees.
Can you get a SEP IRA if you don’t have a business?
No, you will need to either be self-employed or own a business in order to contribute to a SEP IRA.
Which IRAs have RMDs?
All IRAs except for the Roth IRA has required minimum distributions (RMD). Per IRS rules, you must start taking distributions from your IRA once you reach the age of 73. You can view RMD amounts here.
Which IRAs have a Roth option?
Only the Roth IRA has a Roth option. All other IRAs are pre-tax retirement accounts.