IRA
Advantages and Disadvantages

Advantages

Disadvantages

  • The participant is fully vested in the account at all times.

  • The participant has complete control over allowable investment choices and decision making

  • Contributions provide for current year tax deductions. Withdrawals are taxable when distributed. Taxpayers may save on taxes through the time value of money from tax deferral and when distributions are taxed at a lower rate than at the time contributions were deducted.

  • No annual reporting requirements.

  • Distributions may be used for qualified college expenses and first-time home purchases without the 10% early withdrawal penalty. These exceptions do not apply to other qualified pension plans. 

  • Deemed IRAs. As part of an employer plan, the employee also has the convenience of having contributions made through payroll deductions. 

Traditional IRA
  • The basis in a nondeductible traditional IRA must be mixed in with all other funds The tax-free basis can not be fully distributed until all funds in all traditional IRAs have been depleted.

  • Taxpayers are required to begin distributions at age 72.

  • Deductible contributions are subject to phaseout rules for taxpayers who are also covered by an employer retirement plan.

  • Contribution limits are generally lower than SIMPLE IRAs, SEPs, and other qualified plans. 

Roth IRA
  • Contributions are not tax-deductible, but qualified distributions, including tax-deferred earnings, can be withdrawn tax-free. Roth IRAs generally come out ahead of traditional IRAs over long periods of time but fall behind traditional IRAs over short periods of time. 

  • Unlike nondeductible traditional IRAs, tax-free distributions come from the taxpayer's basis before taxable earnings.

  • The participant has complete control over investment choices and decision-making.

  • Taxpayers are not required to begin distributions at age 72 like traditional IRAs.

  • AGI phase-out range is higher than for traditional IRAs.

  • If traditional IRA contributions are nondeductible under the covered by "employer retirement plan rules," a Roth IRA has more advantages than a nondeductible traditional IRA.

  • No annual reporting requirements.

  • Deemed IRAs. As part of an employer plan, the employee also has the convenience of having contributions made through payroll deductions. 

  • No current tax deduction for contributions. Tax benefit comes through future tax-free distributions. Under certain conditions, it could take 15-20 years before the benefit of a Roth IRA contribution exceeds that of a traditional IRA contribution.

  • Uncertainty over future tax law changes makes future planning difficult and may make benefits less attractive than current tax deductions. 

SEP IRA
  • The participant is fully vested in the account at all times.

  • Same tax deduction and deferral of income advantages as a traditional IRA.

  • Deductible contributions are not subject to AGI phaseout rules for taxpayers who are covered by another employer's retirement plan. 

  • The maximum contribution allowed for higher-income taxpayers is generally greater than an IRA.

  • A SEP can be set up and deductible contributions made as late as the return due date, including extensions. 

  • No annual reporting requirments.

  • The employer must fund 100% of a participant's contribution. (Exception-SARSEPs established prior to 1997)

  • Low-income participants cannot contribute as much to a SEP IRA as they can to a traditional IRA or a SIMPLE IRA

SIMPLE IRA
  • The participant is fully vested in the account at all times.

  • Same tax deduction and deferral of income advantages as a traditional IRA.

  • The maximum contribution allowed is generally greater than an IRA.

  • Lower-income taxpayers can contribute a higher percentage of earnings than a SEP.

  • No annual reporting requirements.

  • Similar features of a 401(k) plan without the complexity and restrictions placed on highly compensated employees. An owner can set up a plan where no employee elects to participate and still receive the full benefit of contributing to his or her own retirement account. 

  • Elective deferrals through payroll withholding make it easier for employees to save for retirement.

  • Unlike a SEP IRA, most of the funds are contributed by the employee through voluntary elective deferrals. The employer match is relatively small in comparison. 

  • Must be set up by October 1 of the year contributions are to apply. The taxpayer cannot wait until filing the return to divide whether or not to set up a SIMPLE IRA for the year. 

  • Employers with over 100 employees cannot have a SIMPLE IRA.

  • Lower elective deferral limits than 401(k) plans. 

*List taken from The Tax Book 2020 edition