Individual Retirement Accounts (IRAs) are retirement savings accounts that provide special tax advantages not available for other types of savings accounts. IRAs vary based on types of contributions, tax advantages, income requirements and limits, and age limits for contributions and withdrawals, but the main difference is when you pay income taxes on the money. The three most popular types are Traditional, Roth and Simplified Employee Pension (SEP) IRAs.

Traditional and SEP IRAs allow tax deductions for contributions, while Roth IRAs allow you to withdraw your money in retirement tax-free. With traditional and SEP IRAs, you pay taxes when you withdraw money from 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 three IRAs compare.

Traditional IRA

Putting money in: Contributions to a traditional IRA may be tax-deductible in the year you make them, depending on your income and participation in an employer-sponsored retirement plan, such as a 401(k). You can continue to contribute to these accounts as long as you have earned income (a paycheck).

Tax-deferred savings: Your contributions and earnings grow tax-deferred, which means you won’t pay income taxes until you withdraw money from the account. Even if you aren’t eligible for a tax deduction, your savings will still be tax-deferred.

Taking money out: You’ll need to begin withdrawing money (usually referred to as required minimum distributions) by age 72. The money will be taxed at your income tax rate at the time you withdraw it.

Roth IRA

Putting money in: With a Roth IRA, your contributions aren’t tax-deductible. Contributions can be made as long as you have earned income.

Tax-deferred savings: Roth IRAs allow for tax-free growth over your lifetime.

Taking money out: Withdrawals are tax-free, subject to certain requirements:

  • You’re at least age 59½.
  • You’ve had your account for at least five years.

You can still make withdrawals if you don’t meet these requirements, but you may pay taxes and/or penalties.

Simplified Employee Pension (SEP) IRA

Putting money in: SEPs allow self-employed individuals and businesses to contribute to a retirement plan for themselves/their employees. These plans allow both employers and employees to contribute to the account subject to certain restrictions, and contributions are tax-deductible for the employer. Contribution limits are higher for SEP IRAs—a maximum of 25 percent of the employee’s income (up to $57,000).

Tax-deferred savings: Contributions and earnings grow tax-deferred until withdrawn.

Taking money out: Your funds are taxed at your regular income tax rate when they’re withdrawn. Unlike other types of retirement accounts, you can withdraw money from an SEP at any time without having to show a hardship, but you may be subject to taxes and a 10% tax penalty.

Ready to start saving, but still want to know more? Navy Federal Credit Union offers more information on retirement accounts like savings rate comparisons, simple explanations on consolidating if you have more than one IRA and more. Explore your retirement savings options to build the retirement you want.

IRA Options Table
Traditional IRA Roth IRA SEP IRA
Potential Tax Write-Off Yes Yes
Income Restrictions Yes
Tax-Free Earnings Growth 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 $57,000
Adjusted Gross Income Eligibility Almost everyone with earned income (some exceptions) Individuals earning <$139K (2020)

Married filing jointly: Those earning >$206,000 $196,000->$206,000: allowable contribution reduced. $206,000+: contribution not allowed

Married filing separately: Those earning <$10,000: allowable contribution reduced. $10,000+: contribution not allowed
Everyone with self-employed earned income (some exceptions)
Maximum Age to Make Contributions No maximum while earning a paycheck No maximum while earning a paycheck 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 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
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)
  • Heirs are required to withdraw everything in the IRA within 10 years.

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 72 None 72

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.