Individual Retirement Accounts
In 1974, the government established traditional IRAs to encourage individuals to save money for their retirement. The benefits of investing in a traditional IRA include tax-deferred earnings and, in some cases, tax deductibility.
The Taxpayer Relief Act of 1997 created Roth IRAs which are nondeductible accounts that feature tax-free withdrawals for certain distributions reasons after a five-year holding period. The term “tax free” means free from Federal Income Tax.
COVERDELL EDUCATION SAVINGS ACCOUNT (CESA)
The Coverdell Education Savings Account is a nondeductible account that features tax-free withdrawals for a very specific purpose – a child’s education expenses.
SIMPLIFIED EMPLOYEE PENSION (SEP) PLAN
A Simplified Employee Pension (SEP) plan is a business retirement plan that uses traditional IRAs to house contributions. The employer contributes money into its employees’ IRAs. The employer gets an immediate tax break and the contribution is not income to the employee until it is distributed from the IRA. An employer who wishes to establish a SEP should seek professional guidance from someone who is familiar with that employer’s business.