Retirement accounts go beyond traditional options

Here’s a quick look at several basic classes of IRAs, with contribution limits listed as current for this year.

Traditional

Annual Contribution Limit = $4,000

Created in 1974 as part of the Employment Retirement Income Security Act, the traditional IRA is essentially an individual savings plan. Contributions are tax-deductible, when requirements are met, with an annual limit. Although earnings within the traditional IRA grow tax-deferred until withdrawal, they will be taxed when withdrawal begins – and this must happen by the time the owner reaches the age of 70K. If the required amounts are not withdrawn at that age, a 50 percent penalty will be assessed on the amount not taken.

Roth

Annual Contribution Limit = $4,000

The Roth IRA began in the 1998 tax year, a result of 1997’s Taxpayer Relief Act. A Roth IRA gives individuals the ability to invest post-tax income, up to a specified amount, each year. Roth IRA earnings grow tax-free, and withdrawals may be made free of penalty after the owner reaches the age of 59K, as long as the funds have been in the account for a minimum of five years.

While contributions to a Roth IRA are not tax-deductible, a Roth IRA has advantages on the back end, with fewer requirements and limitations regarding withdrawals.

SIMPLE

Annual Contribution Limit = $10,500

A savings incentive match plan for employees, or SIMPLE IRA, is a qualified retirement plan provided by employers with 100 employees or fewer. Unlike plans such as the 401(k) or 403(b), a SIMPLE IRA has much simpler and more affordable administration rules. SIMPLE IRAs also have lower contribution limits than many other types of IRAs, but they are funded by pre-tax salary reduction and require the employer to contribute a minimum amount.

SEP

Annual Contribution Limit = $45,000

The simplified employee pension, or SEP-IRA, tends to be even more simple than the SIMPLE IRA.

Contributions are tax-deductible, but as with a traditional IRA, qualified withdrawals taken after age 59K are subject to taxation at standard income tax rates. If an employer implements an SEP plan, all employees must receive the same benefits. If you are self-employed with no employees, there are no administration costs.

Uni-K

Annual Contribution Limit Varies

The Uni-K is a profit-sharing plan with no annual contribution requirements for owner-only small businesses. It is cost-effective and can offer some major advantages compared to some other small business plans, such as increased contribution limits.

Contributions are tax-deductible to the business, and employee contributions are made pre-tax.

Distributions may be taxable, and there is usually a 10 percent penalty applied to withdrawals by participants under the age of 59K.

Roth 401(k)

Annual Contribution Limit = $15,500

First introduced to investors in 2006, the Roth 401(k) has the same contribution limits as a regular 401(k) plan. In essence, it is a 401(k) account that, in terms of taxes, is treated like a Roth IRA. The major difference is that 401(k) contributions are made pre-tax, whereas the Roth 401(k) is funded with after-tax dollars. Which is better? It depends on your situation and whether you’d like to be taxed up front or later on.

Regarding Roths, it is worth noting that the laws permitting Roth IRAs and Roth 401(k)s will be up for renewal in 2010. What does that mean? Well, there’s always the chance that Congress could decide not to extend the laws, in which case you could no longer contribute to these accounts. That merely means, however, that you will be forced to make new contributions to the traditional versions of these accounts after 2010. It does not mean that you will be taxed on or lose money from the accounts.

You should consult a qualified financial adviser regarding your IRA options. There are many choices available when it comes to IRAs, and it is vital that you not only understand each choice, but how that choice could affect your unique financial situation.

No one IRA is the “right” IRA for everyone, so do your homework and seek advice from a qualified professional if you are unsure of how to proceed.

David M. Compere. CFP, CTFA, is the president of Longview Capital Management LLC in Springfield. He is a Representative with ING Financial Partners Inc., member SIPC, and may be reached at david.compere@ingfp.com.