Individual Retirement Accounts (IRAs) are designated retirement savings accounts that allow you to set aside money and offer tax advantages on those funds. Several different types of IRAs exist, and they vary based on factors like types of contributions, tax advantages, income requirements and limits, age limits for contributions, and withdrawals. The main difference between them is when you pay income taxes on your contributions to the plan.

Navy Federal offers 3 types of IRAs: Traditional, Roth and Simplified Employee Pensions (SEPs). You can choose to have just one, or you can utilize a mix of these accounts depending on your financial situation, employment status or personal preference. Traditional and SEP IRAs offer tax deductions for contributions, while Roth IRAs allow you to grow earnings tax-free. With Traditional and SEP IRAs, you pay taxes when you withdraw the money in the retirement plan. With a Roth IRA, you pay taxes at the time you contribute, but the eventual distribution is tax-free as long as you meet certain requirements. Here's a more in-depth look at how these 3 IRAs compare:

Traditional IRA

These potentially tax-deferred retirement plans allow you to avoid paying taxes on contributions and earnings until you withdraw. Both deductible contributions and earnings are then taxed at your regular income tax rate.

Contributions can be made as long as you have earned income and you're below the age of 70½ in the tax year the contributions are made.

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Roth IRA

Roth IRAs allow for tax-free growth over your lifetime. While contributions are not tax-deductible in the year they're made, withdrawals that are classified as "qualified distributions" are tax-free.

Contributions can be made beyond age 70½ with earned income. No required minimum distributions allow you to choose when to withdraw.

Simplified Employee Pension (SEP) IRA

SEPs allow businesses and self-employed individuals to contribute to retirement plans for themselves and their employees. Available for all business types, SEPs allow both employers and employees to contribute to the account.

SEPs allow tax-deferred contributions. A required minimum distribution is enforced at age 70½.

Traditional IRA Roth IRA SEP IRA
Potential Tax Write-Off Yes Yes
Income Restrictions Yes
Tax-Free Earnings Growth Yes
Age Restrictions With Earned Income Yes
Employer Contributions Yes
Maximum Annual Contribution1 $6,000 under age 50, $7,000 age 50+ $6,000 under age 50, $7,000 age 50+ 25% annual compensation, not to exceed $56,000
Adjusted Gross Income Eligibility Almost everyone with earned income (some exceptions) Individuals earning <$137K (2019)

Married couples earning <$203K (2019)
Everyone with self-employed earned income (some exceptions)
Maximum Age to Make Contributions The year in which you turn 70½ No maximum No maximum
Non-Wage-Earning Spousal Contributions Same as wage earner Same as wage earner Same as wage earner
Tax Deductibility of Contributions Up to 100%, depending on modified adjusted gross income and participation in employer-sponsored pension plan Cannot deduct contributions May be tax deductible, based on specific eligibility rules
Tax Treatment of Dividend Earnings Grows tax-deferred until withdrawn Grows tax-free Grows tax-deferred until withdrawn
Taxes Upon Withdrawal Non-deductible contributions received tax-free; earnings and deductible contributions taxed at ordinary income tax rate None, as long as withdrawal is a qualified distribution Non-deductible contributions received tax-free; earnings and deductible contributions taxed at ordinary income tax rate when withdrawn
Withdrawal Restrictions Most made before age 59½ result in IRS penalties

Exceptions:
  • IRS levy
  • Qualified reservists
  • College expenses
  • Disability or death
  • Unreimbursed medical expenses
  • First-time home purchases ($10,000 lifetime limit)
Penalty-free withdrawal after age 59½ provided money has been in account at least 5 years

Penalty-free and tax-free withdrawals prior to age 59½ if the funds are used for:
  • Disability or death
  • First-time home purchases ($10,000 lifetime limit)
Most made before age 59½ result in IRS penalties

Exceptions:
  • Qualified reservists
  • College expenses
  • Disability or death
  • Unreimbursed medical expenses
  • Unemployed medical insurance premiums
  • First-time home purchases ($10,000 lifetime limit)
Age at Which Withdrawals Must Begin 70½ None 70½

1The maximum can be contributed to a Traditional, Roth or SEP IRA, or split between all three.

This information was provided for informational purposes only. Navy Federal Credit Union is federally insured by NCUA.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.