The Rundown On IRAs: What They Mean for You

We need to talk about retirement. And yes, we know it's the last thing you want to think about right now, but while you have time on your side, you could benefit from getting started now. Here's the truth: By the time Gen Y is set to retire, your nest egg will need to be anywhere from $1.8 to $2.5 million.

That's a lot of cash, right? Well, it's time to get started. An Individual Retirement Account (IRA) is a type of savings account designed to help you save for retirement while offering a variety of tax advantages.

The two most common are traditional and Roth IRAs. Let's explore each in further detail to help you better understand their nuances:

Roth IRA

• A Roth IRA is funded with after-tax dollars, meaning you're using money you've already paid taxes on.
• If contributions lead to growing value over time the account will grow tax-free, so your withdrawals won't be subject to taxes.
• You can contribute up to $5,500 annually.
• Qualification is simple: As long as you earn less than $117,000 annually ($184,000 for joint filers), you can contribute to a Roth IRA.

Traditional IRA

• A traditional IRA is a tax-deferred retirement account, meaning growth that takes place will encounter a tax liability when withdrawn.
• Your contributions may be tax-deductible.
• BUT taxes are incurred at time of withdrawal, and the tax rate may increase over the years.
• You can contribute up to $5,500 annually.
• Qualifications are simple and include anyone with taxable compensation or self-employment income who will not reach age 70 1/2 by the end of the year. However, deducting contributions from your taxes is based on income.

There are a few other types of IRAs we haven't covered yet. Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs are less common, but are worth a look by the entrepreneur:

SIMPLE IRA

• Intended for small business owners with up to 100 employees who are not currently sponsoring a retirement plan.
• Offers employees a salary-deferral contribution feature along with matching employer contributions.
• Allows you to contribute part of your pretax dollars to a retirement account.
• This plan does not have the startup and operating costs of a conventional retirement plan.
• Qualifications include having earned at least $5,000 in compensation during any previous two years and also expecting to receive at least $5,000 during the current calendar year.

SEP IRA

• A variation of the traditional IRA that allows small business owners with one or more employees to save pretax dollars for retirement.
• Good for businesses with variable profits.
• Qualifications include being over 21 years old, having worked for your employer for three of the last five years and having received at least $600 in compensation from your employer during the year.
• Quick and easy to set up.