Retirement. It’s something that most of us don’t think we need to worry about until we get older. Retirement is also something that most of us don’t think we can worry about right now. After all, we have student loans, expensive healthcare costs, rising housing prices, kid’s college, aging parents, and a host of other financial worries that usually push the idea of retirement to the back of our mind. Additionally, retirement can be overwhelming. Most people have no idea what to invest in, how the investing process works, what tax implications our decisions may have, and most of all; how much money do you need to retire. 

While all of these questions will be answered in future articles, this article will start on the ground floor with the question: What are the different types of retirement plans? There are several different types of retirement plans and in this article, we will be addressing #1: Traditional IRAs. These articles will give you an idea of what to look for when deciding on how to save for retirement and what type(s) of retirement accounts to save in.

Types of Retirement Plans

1. Traditional IRA (this article)
2. Roth IRA
3. 401(k)
4. 403(b)
5. SIMPLE IRA
6. Simplified Employee Pension (SEP)
7. Salary Reduction Simplified Employee Pension Plan (SARSEP)
8. Payroll Deduction IRA
9. Profit-Sharing Plan
10. Defined Benefit Plan
11. Money Purchase Plan
12. Employee Stock Ownership Plan (ESOP)
13. Thrift Savings Plan (TSP)
14. 457 Plan

IMPORTANT: READ THIS BEFORE CONTINUING

Before we get into the types of retirement accounts, it is important to make one key distinction. A retirement account, itself, is not an investment. If you say something to the extent of, “My 401(k) hasn’t done very well this past year and I’m thinking of picking a different one” you would be making an incorrect statement.

Think of it like this: There are 14 different types of retirement accounts (we will discuss the other 13 in different articles). Each one of those retirement accounts should be thought of as a cooking pot. If you cook something in that pot and you don’t like what it tastes like, you don’t dump the contents into another pot and hope that it tastes better. You change the ingredients of that pot to something else. Now think of the ingredients as different investment products (stocks, bonds, cash, mutual funds, and/or a host of other products/ingredients).To get the taste you want, you change the ingredients, not the pot. You may be wondering, what ingredients do I put into my pot? That is a fair question, but you cannot answer that question until you figure out what pot is best for you. Now buckle up and find out what the 14 different types of retirement accounts (pots) you have at your disposal.

Credit: Nicholas Gras: https://unsplash.com/@armgd

(1) Individual Retirement Arrangement (IRA)

An IRA (often referred to as a traditional IRA) is the most basic form of retirement account. It is money that has been put into an account to be used for one’s retirement savings. You can have multiple IRA if you so choose as well. IRAs are typically used for people to roll their existing employer-sponsored retirement accounts (we will discuss those later) into. Think of it as a root cellar. You grow your vegetables in the garden, can them, and then put them in the root cellar until you need them later. If, for some reason, you don’t like the retirement program offered at your employer, your employer doesn’t offer one, or you are self employed you can open an IRA and contribute to it. 

Within a traditional IRA you can have many different investments such as:

1. Stocks
2. Bonds
3. Mutual funds
4. Unit investment trusts
5. Government securities (Treasury bills, treasury notes, and treasury bonds)
6. US government-issued gold and silver coins. 

If you don’t know what all of these different terms mean, that is perfectly fine. Just know that you can have nearly all investment within an IRA.

But, there are a few items that cannot be in an IRA. IRAs cannot have:

1. Antiques
2. Gems
3. Rare coins
4. Works of art
5. Life insurance contracts: This is because life insurance contracts are not securities (investments).
6. Municipal bonds: This is because putting a municipal bond in an IRA would negate the tax free status of the municipal bond.

Antiques, gems, rare coins, and works of art cannot be included in traditional IRAs because these items do not have a solid market value. Meaning: I might be willing to pay $50,000 for a painting, but you may be willing to only pay $3,000 for the same painting. It is too difficult to find an agreeable market value.

There are some stipulations to having an IRA that are important to know.

1. Contribution Limits (as of 2021): You can contribute up to $6,000/year unless you are 50 years old or older, at which time you can contribute $7,000/year. This is known as the “catch-up” contribution. It is meant to help people who are a little bit older put more money in their retirement account because they have less time before retirement. The catch-up contribution can start to be made the year that you turn 50. So if your birthday is in September, you can contribute the full $7,000 starting in January of that year even though you are only 49.

Age	Maximum Contribution
Less than 50	$6,000
50 (the year you turn 50)	$7,000
Older than 50	$7,000

The other contribution limitation is based on your earned income. Someone investing in a traditional IRA cannot contribute more than their earned income. For example, if you earned $3,000 you cannot contribute more than $3,000. The word “earned” is important for this discussion. Earned income is based on money that you (you guessed it) earned. This is nearly always from salary, wages, tips, bonuses, self-employment income, or farm income. Earned income is not from:

1. Child support
2. Rental property income
3. Interest and dividend income
4. Income while incarcerated
5. Retirement income
6. Social Security
7. Unemployment benefits
8. Alimony (Although this one is tricky because the laws have changed regarding this. Check with a CPA to make sure.)

Age	Income	Maximum Contribution
Less than 50	Less than $6,000	Amount of earned income
Less than 50	$6,000	$6,000
Less than 50	More than $6,000	$6,000
50 or older	Less than $7,000	Amount of earned income
50 or older	$7,000	$7,000
50 or older	More than $7,000	$7,000

2. Contribution Deductions (as of 2021): A traditional IRA has some pretty good tax benefits. All money that you put into a traditional IRA is done pre-tax. What that means is that you don’t pay taxes on the money that you put into a traditional IRA. For example, If you make $80,000 in a year and contribute $4,000 to a traditional IRA, you will then pay taxes based on $76,000 of income ($80,000-$4,000), instead of the full $80,000 that you earned. This is often referred to as “reducing your tax exposure” or “a tax favored investment”.

3. Contribution Tax Deduction Limits (as of 2021): There are no income limits for contributing to a traditional IRA. You can make $ 10 million/year and still contribute $6,000 (or $7,000 if you are 50 years old or older). However, you may not be able to take advantage of the tax deduction (as mentioned in the previous point) if you make over a certain amount. If you make over a certain amount of money per year, your deduction begins to phase out and it will eventually disappear when you reach a higher amount of earned income. You can always contribute to a traditional IRA regardless of your income, you may just not be eligible for the tax deduction. Here are the tables to determine if you can get the whole deduction based on your income and how you file your taxes. The phaseout also depends on whether you (and, if applicable, your spouse) are covered by a retirement plan of some kind at your workplace. The IRS does not want people to take advantage of a tax deduction that you would get with a 401(k) at your job AND a traditional IRA. Yeah, I know. The IRS wants to make sure that they get their money.

4. Early Withdrawal (as of 2021): You should never take money out of a traditional IRA until you are at least 59 ½. This is the most important consideration of a traditional IRA (and any retirement account for that matter). This money is not there for you to buy a boat or go on a vacation, it is to retire with. If you take money out of a traditional IRA before age 59 ½ you will pay taxes and a penalty of 10%. For example, if you are single and make $50,000/year and want to withdraw $10,000 from a traditional IRA, you will be taxed 22% ($2,200) + 10% penalty ($1,000). You will only come home with $6,800 (even though you withdrew $10,000) after taxes and the penalty. However, there are a few exceptions to the early withdrawal rule.

1. Death: Your heirs can take the money, not you, you’re dead.
2. Disability: If you become permanently disabled, you can withdraw from your traditional IRA without penalty (although you will still have to pay the appropriate taxes).
3. Home purchase: You can withdraw up to $10,000 from a traditional IRA for the purchase of your first home (primary residence) without penalty (although you will still have to pay the appropriate taxes).
4. Higher education expenses: This would be paying for college, community college, or technical school for yourself, your spouse, your child, or grandchild. 
5. Medial premiums during unemployment: You can withdraw the amount of health insurance premiums during the time that you are unemployed without penalty (although you will still have to pay the appropriate taxes.)
6. Unreimbursed medical expenses: You can withdraw the amount needed to pay any medical expenses that have not (and likely will not) be reimbursed by another party without penalty. But once again, you will still have to pay taxes on this amount.
7. Qualified disaster distributions: If you receive “substantially equal periodic payments” when you have been the victim of a qualified disaster you will not be subject to the 10% penalty so long as the distributions do not exceed $100,000.

5. Required Minimum Distributions (as of 2021): You will have to start taking the money out when you turn 70 ½.. This is called a Required Minimum Distribution (or RMD for short). The amount that you have to take out each year starting at 70 ½ (or more precisely, by April 1st of the year following the year you reach 70 ½) is outside the scope of this article. Just know that when you turn 70 ½, even if you don’t need the money, you will be required to take out some of it each year. To find out the exact amount, talk to your CPA or a financial advisor and they would be happy to help.

(1a) Spousal IRA

A spousal IRA works the same as a traditional IRA but is meant for a spouse who does not have an income. By definition, a spousal IRA is just an IRA for a spouse. If you file your taxes as Married Filing Jointly (MFJ), and one spouse does not have an income but the spouse does, then the non-working spouse can still open a spousal IRA.

Spousal IRAs were first started to help protect wives. In the past, it was very common for a wife to stay at home and raise the children. It was not uncommon for a wife to not have credit cards, personal loans, mortgages, or retirement accounts. This was a huge problem because if the husband were to pass away or the couple were to divorce, the wife would have no credit, likely no job history, and no retirement income. Although times have changed, and this scenario is far less common than it was 40 years ago, there are still lots of spouses that do not work outside the home. 

If you want to open a spousal IRA, you must meet these qualifications:

1. File your taxes with the Married FIling Jointly (MFJ) designation
2. Adhere to the same limits, rules, and regulations of a traditional IRA (as stated earlier in this article)
3. Not contribute more than the earned income of the working spouse

Here is an example of how much can be contributed to both a traditional IRA and spousal IRA in a given year, provided the couple is filing MFJ:

Age	Spouse #1 Income	Spouse #2 Income	Traditional IRA Limit	Spousal IRA Limit	Total IRA Contribution Limit
Less than 50	$6,000	$0	$6,000	$6,000	$6,000 (split between both IRAs)
Less than 50	$20,000	$0	$6,000	$6,000	$12,000
50 or older	$7,000	$0	$7,000	$7,000	$7,000 (split between both IRAs)
50 or older	$20,000	$0	$7,000	$7,000	$14,000

I know that this is a lot of information but it is important to know what a traditional IRA is, if it is appropriate for your situation, and how it can help you. You don’t necessarily have to understand the entire IRS rulebook regarding traditional IRAs, but I hope that you now have a better understanding of how they work. This is just one more way that you can exercise your Money Muscle and become a little more financially fit.