What Is an IRA?
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"A major perk of Roth IRAs is that you can withdraw your contributions anytime without penalty."

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You don’t need access to a company 401(k) to open a tax-advantaged retirement account. Just about anyone with an income—or even a spouse with an income—can open an Individual Retirement Account (IRA) and invest money for the future.

Three popular types include a traditional IRA, Roth IRA and SEP IRA.

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Traditional IRA

For 2017 and 2018, you can invest up to $5,500, or $6,500 if you’re 50 or older. You may be able to deduct those contributions—depending on your household income and access to workplace retirement plans—and pay Uncle Sam less today. However, you’ll owe taxes on the money you withdraw in retirement. Once you reach the year you turn 70½, you can no longer contribute, and you must start taking minimum withdrawals.

Because this money is meant for retirement, tapping it before age 59½ means you’ll owe regular income taxes, plus a 10-percent penalty in most cases.

Roth IRA

Named after the senator who championed the plan, a Roth IRA isn’t tax deductible, but your money grows and can be withdrawn tax-free down the road. You can contribute up to $5,500 for 2017 and 2018, or $6,500 if you’re 50 or older—but there are income restrictions. To max out the account in 2017, you must earn less than $118,000, or $186,000 if you’re married and filing taxes jointly. In 2018, you must earn less than $120,000, or $189,000 if you're married and filing jointly. There are no age restrictions on making contributions.

A major perk of Roth IRAs is that you can withdraw your contributions anytime without penalty. However, if you dip into your investment earnings before 59½, you may owe a 10-percent penalty and taxes. The exception is if you have had your Roth IRA for at least five years and you’re making the withdrawal because you are disabled or if you are using it to rebuild or buy a first home.

SEP IRA

Simple Employee Pension (SEP) IRAs are meant to incentivize people who are self-employed or small business owners to save (a lot) for retirement. In 2017, you can contribute 25 percent of your compensation, with a $270,000 cap—or up to $54,000. (The cap bumps up to $275,000 up to $55,000 for 2018.) You can deduct your contributions now; you won’t pay taxes until you withdraw the money in retirement. You must start taking minimum distributions at age 70½.

Before signing up for a SEP IRA, know this: If you have employees the IRS deems eligible to participate in your plan—who are 21 or older, have worked for you at least three of the last five years and received at least $600 in compensation this year—you must contribute on their behalf. Whatever percentage of income you contribute to your account must also be made to theirs. Tap this money early, and you’ll pay regular income taxes and the 10-percent penalty.

It’s worth noting that there are certain situations, like buying a first home or covering qualified education expenses, in which you can avoid the early withdrawal penalty in place for all three IRA types. But you’ll still have to pay taxes on a traditional or SEP IRA (and sometimes Roth, too, if you’re withdrawing earnings early), and you’ll be sacrificing potential investment gains during the time your money’s out of the market.

This story was updated in December 2017.

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