With the recent passing of the SECURE 2.0 Act of 2022, you may have questions about the different types of Individual Retirement Accounts (IRAs) available. How do you choose what retirement plan is right for you?
IRAs are a powerful tool for retirement savings. They are savings plans that come with tax advantages to help taxpayers build a retirement fund. Each type of IRA has its own set of regulations and deadlines. Here’s a quick overview of the most common kinds:
Contributions to a traditional IRA may be tax deductible and earnings grow tax-deferred until distribution, which means you won’t pay taxes on your traditional IRA funds until you make a withdrawal. The contribution limit for 2022 is $6,000, or $7,000 for those aged 50 and over ($6,500 and $7,500 for 2023). You have until April 15 or the tax filing deadline of the following year to make contributions for the previous tax year. Since the deadline is April 18 this year, you have a few extra days to make contributions for 2022.
Unlike a traditional IRA, contributions to a Roth IRA are made after tax, so qualified withdrawals are tax-free. The contribution limit for 2022 is also $6,000, or $7,000 for those aged 50 and over ($6,500 and $7,500 for 2023). Roth IRAs have the same deadline as traditional IRAs, so you can contribute up until April 18 this year.
A Simplified Employee Pension (SEP) IRA is a retirement plan for business owners and their employees. Employers can make tax-deductible contributions on behalf of eligible employees to their SEP IRAs. To be eligible, the employee must be 21, worked in the business at least 3 of the last 5 years and made at least $650 in 2022 ($750 in 2023). Like traditional IRAs, the earnings grow tax-deferred until the money is withdrawn. In 2022, employers can contribute up to 25% of compensation or $61,000 (whichever is less) to an employee’s plan ($66,000 in 2023). The same contribution limits apply if you are self-employed. Contributions must be made by your business’s tax-filing deadline, including extensions.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan for businesses with 100 or fewer employees that do not have any other retirement savings plan, including self-employed individuals. Because SIMPLE IRAs have lower start-up and operating costs, they are ideal for small employers. Employers must contribute a matching contribution for each eligible employee of either 3% of an employee’s compensation, or a nonelective contribution of 2% of the employee’s compensation, up to $305,000 for 2022 ($330,000 for 2023). Eligible employees include all employees who received at least $5,000 in compensation during any two preceding calendar years and in the current calendar year. An employee can contribute up to $14,000 from their salary in 2022 ($15,500 in 2023), and up to $17,000 for those 50 and over ($19,000 for 2023). Contributions must be made by the tax-filing deadline, including extensions.
The rules and regulations surrounding IRAs can be complex and can change, so it’s always good to consult with a financial advisor and tax professional to ensure that you’re maximizing your retirement savings while complying with the plan rules.
Whether you’re an individual looking to build your retirement fund or a small business wanting to offer a retirement plan to your employees, Padgett can help! Our nationwide network of EAs, CPAs and small business advisors are ready to work with you to prepare for the future. Find a location near you today!