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The Many Flavors of IRAs: Which Is for you?

2017 April 2017 Finances Yann Kostic

By Yann Kostic from the April 2017 Edition

Americans expats hear a lot these days about the importance  of saving for retirement, but what is equally important is how  to manage their IRA’s once they have retired. Individual retirement accounts (IRAs) and 401(k) are one way to build a nest egg, but the variety of these investments can be confusing, and you may need your advisor’s help to select the one that is right for you, especially of you reside overseas. For example:

With a traditional IRA, you contribute pretax money, and it grows tax deferred; you do not pay taxes on it until you with- draw it, at which time it is taxed as ordinary income. However, after age seventy, you must stop contributing and start taking required minimum distributions (RMD).

On the other hand, with a Roth IRA, you contribute after tax money. It still grows tax-deferred, and withdrawals are tax-free in retirement. Moreover, you do not have to take RMD’s after you reach seventy.

With both traditional and Roth IRAs, you can contribute $5,500 if you are under age 50, and $6,500 if you are older than    age 50. Generally, you would choose a traditional IRA if you think you will be in a lower tax bracket in retirement and a Roth IRA if you think you will be in a higher tax bracket.

The SEP IRA is available to individuals who are self-employed  or operate a small business. As with the traditional IRA, you contribute pretax funds, and withdrawals are taxed as ordinary income. The difference: the annual contribution limit is much higher. In 2017, you can contribute up to 25% of your income, to a $54,000 ceiling.

Also geared toward the self-employed and small-business owner is the SIMPLE IRA. You contribute pretax funds, and withdrawals are taxed as ordinary income, but the contribution limits are lower. They are $12,500 if you are under age 50,  and $15,500 if you are 50 or older.

As a small business owner, you can set up a SIMPLE IRA for your employees, who can elect to contribute. You’ll match their contributions according to one of two formulas. And if you’re self-employed with staff, you can contribute as both employer and employee.

When you retire overseas, you may also have different considerations and making changes to your IRA or 401(k) (such as consolidations and/or rollovers) become as imperative as they become delicate with important tax implications.

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