There are a lot of individual retirement accounts to choose from. It is always wise to understand each of them to know which one suits you and your financial situation the best. Here are the more common types of IRAs:
1. Traditional IRA
This kind of IRA is kept by a custodian, such as a bank or brokerage. It can be invested in anything as long as it's allowed by the custodian. Contributions made in this IRA are often tax-deductible, but withdrawals and profits will be considered as income and are subject to being taxed.
2. Roth IRA
All transactions in this IRA have no tax impact and contributions are made with income already deducted by tax. Withdrawals of contributions and earnings are generally tax-free.
3. Simplified Employee Pension (SEP) IRA
This is a company-sponsored IRA and can be opened by a sole proprietor with or without employees and also small businesses. No real administration fees are collected if you are self-employed and have no employees. If you do, all employees will receive the same benefits under the SEP IRA plan.
4. Savings Incentive Match Plan for Employees (SIMPLE) IRA
This is a simplified employee pension plan likened to a 401(k) plan but costs less and is simpler. In this type of IRA, the funds are from pre-tax salary contribution and contribution limits are lower than most employer-provided pension plans.
5. Educational IRA/Coverdell Education Savings Account (ESA)
This account helps parents and students have funds for higher education purposes. Both contributions and withdrawals in this IRA are non-deductible by tax.
6. Self-Directed IRA
This IRA allows the account holder to make investment decisions such as stocks, bonds and mutual funds on behalf of his retirement plan.