Which IRA is right for you?

If you haven’t already heard, Swell is now offering Impact IRAs!

Queue up a quality playlist and grab your dance shoes because it’s a reason to celebrate. Why? Because now you can maximize the perks of a retirement account while still investing in companies that are out there making a difference in the world. Get ready to say hello to your Impact IRA.

What makes IRAs so magical?

They allow you to maximize the benefits of a retirement savings account without having to invest as an employee at a corporation, as you would with a 401(k).

IRAs can be great for supplementing your company’s 401(k), for investing on your own if your company doesn’t offer a 401(k), or if you’re self-employed. Swell offers three kinds of IRAs: Traditional IRAs, Roth IRAs, and SEPs. Each type of account offers its own benefits. To help you decide which account is right for you, take a look at what makes each type of account unique and who would benefit the most from each type of account.

Traditional IRA

First off, what does “IRA” even mean? It sounds fancy and forebodingly financial, but it just stands for “Independent Retirement Account.” It’s actually pretty straightforward, and it tells you exactly what it does. For those who are familiar with (and/or already have) a 401(k), A traditional IRA works a lot like a 401(k), except that you’re doing it on your own.

Not familiar with either of those accounts? Worry not. Here’s the gist: You get to contribute now, tax-free, and then the money is taxed when you withdraw it.

The Perks

The tax-free nature of contributions gives you a larger principal amount in your account, which means you’ll have a larger sum of money accruing compound interest. It’s important to remember that you will have to pay taxes on the money, eventually, when you withdraw it.

What Are the Limitations?

You can contribute a maximum of $5,500 each year (if you’re over 50, that number gets bumped up to a $6,500 max). If you take money out before you’re 59½, you’re going to have to pay a 10% fee.

Who Should Get a Traditional IRA?

Traditional IRAs are great if you’re established in your career, and you don’t anticipate moving up in a tax bracket before you’re going to be taking your money out (this will make more sense once we explain Roth IRAs).

Roth IRA

At the beginning of your career? Anticipating a raise that will put you into a higher tax bracket? Let me introduce you to the magic of the Roth IRA. With a Roth IRA, you contribute money that has already been taxed, and then pay no taxes when the money is withdrawn.

The Perks

The biggest selling point of a Roth IRA is the potential tax savings. If you’re in a lower tax bracket now, and you anticipate being in a higher tax bracket when you retire, this is ideal.

What Are the Limitations?

The maximum you can contribute to a Roth IRA each year is $5,500 (again, if you’re over 50, you can contribute up to $6,500). It should also be noted that Roth IRAs have income limitations, so if you make too much money, this one is going to be off the table.

If you are single or the single head of the household, your modified adjusted gross income (MAGI) needs to be less than $118,000. If you’re married and filing jointly, you can contribute the maximum amount to a Roth IRA as long as your combined MAGI is less than $186,000. At higher income levels, you can contribute a smaller amount based on a formula devised by the IRS.

And like a Traditional IRA, if you withdraw before you’re 59½, you’ll have to pay a 10% fee.

Who Should Get a Roth IRA?

Anyone who is at the beginning of their career, single but planning to marry (especially if your partner’s income would push you over the combined MAGI necessary to qualify for maximum contributions if you were to get married). Basically, if you’re going to be retiring in a higher tax bracket than you’re in now, max out that Roth IRA.

SEP IRA

Reading this article thinking, “When I decided to venture out and start my own business, I said goodbye to the security of a retirement savings account”? Well, then this option is going to speak to your self-employed heart.

An SEP, which stands for Simplified Employee Pension, functions the same way as a Traditional IRA, except that it’s designed for people who are self-employed and their employees. The short version is: you can contribute money tax-free, and then you pay taxes when you withdraw the money.

The Perks

An SEP IRA allows self-employed individuals to enjoy the benefits of retirement savings accounts while minimizing the fees. If you’re self-employed or work for someone who is, this is a great way to take care of your retirement in a way that won’t bombard that small business with fees.

What Are the Limitations?

This is where it gets a little complicated. In the same way that Roth IRAs have restrictions on how much you can earn to be eligible, SEP IRAs have more complicated rules on how much you can contribute.

The maximum amount you can contribute to an SEP for 2017 is 25% of earnings, or $54,000, whichever amount is less. This is true for the person who is self-employed. If you’re self-employed and you also employ others, then you can make that same max contribution on their behalf.

Otherwise, SEPs operate like a Traditional IRA. You make the contributions tax-free, and then when you withdraw, the money is subject to tax. If you withdraw before age 59 ½ without a qualifying reason, you are subject to a 10% fee.

Who Should Get an SEP?

Self-employed individuals should be taking advantage of SEPs. After all, they were designed for you, which means you’re going to benefit the most from them. So, if you’re someone who has embraced the gig economy, work as a creative professional, are starting a new business, and/or have to juggle what feels like a million 1099’s at the end of the year, this one is for you. If you’re someone who is employed and also employs a small number of people, this is a great way for you to provide them something comparable to employer-matching 401(k)s because you can contribute up to 25% of net income for them.

Now that you have the information to figure out which IRA is right for you and your needs, invest in an IRA that can make an impact -- for your future financial health and the health of our present world.