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Retirement Plans For The Self-Employed
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Article 2: Traditional & Roth IRAs
Without an employer contributing to a 401(k) plan on your behalf, you still have good retirement savings options in a traditional IRA or a Roth IRA.
An IRA is a self-directed savings option whose earnings compound over time. Taxes are paid on the money as it is withdrawn in retirement. Anyone drawing a salary, wage or self-employed income is eligible to establish an IRA.
Your IRA brings tax advantages, either in current year tax savings, tax-deferred growth on earnings, or tax-exempt growth on earnings, depending on the plan. A traditional IRA’s contributions are tax-deferred until you withdraw the money. Contributions may or may not be tax deductible, depending upon your income level. A Roth IRA’s earnings are generally exempt from federal taxes.
IRA accounts can be opened through banks, financial brokers and mutual fund companies. You can invest contributions in a variety of instruments, such as stocks or mutual funds. Fees and commissions vary.
A traditional IRA’s contributions aren’t taxed, and its growth is taxed on withdrawal. A Roth IRA’s contributions are made in after-tax dollars, but its growth is tax free.
Both types of IRAs allow working individuals to contribute up to $4,000 a year total, $8,000 for couples. Since actual contribution limits are the same for a traditional IRAs and Roth IRAs, the advantage to a Roth IRA is that you can contribute more in pre-tax dollars than to a traditional IRA.
With a traditional IRA, you must start receiving distributions by April 1 after you reach age 70½. Roth IRAs have no age-required distribution.
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