Umbrella Coverage Plans for Every Season of Life

Traditional IRAs are accounts that allow you to invest up to $6,000 (7,000 if you’re 50 yrs of age or older) and receive favorable tax treatment. This favorable tax treatment will vary depending on your filing status and income. Investments held in IRAs can vary, but they typically range from securities like stocks, bonds, ETFs, and mutual funds. Be aware that IRAs do have an early withdrawal penalty of 10% when withdrawing money out before the age of 59 ½. After the age of 72, traditional IRAs also require you to begin liquidating a minimum amount, failure to do so may result in tax penalties.

Unlike traditional 401(k) contributions, you may contribute “out of pocket” money as opposed to payroll deductions. The advantage of using an IRA is that you may gain access to investment opportunities that your employer-sponsored plans may not have and not having to pay taxes until you decide to withdraw. By contributing to your IRA, you can also reduce your taxable income if you are under certain tax brackets. You will be taxed at the time of withdrawal based on your ordinary income tax rate where most retirees will find themselves in a lower tax bracket maximizing their financial gains. IRAs are designed to incentivize saving and investing by the government. 

Unlike traditional IRAs, a Roth IRA allows you to use “after-tax” dollars. One of the biggest advantages when contributing to Roth IRAs would be not having to pay any taxes on investment gains when withdrawing in the future. This is beneficial to many people in that the money isn’t tax-deductible today, but your money grows and can be withdrawn without penalty down the road. Another great perk of Roth IRAs is that you can choose when you want to withdraw from this account unlike your traditional IRAs, which penalizes you if you do not begin liquidating a portion of your holdings. The contribution limits for Roth IRAs are the same as traditional IRAs. The major difference is that you will not be allowed to contribute to Roth IRAs after reaching a certain threshold. There is also a 5-year rule which you will not be able to withdraw earnings from your Roth IRA funds without being penalized or taxed.

SEP (Simple Employee Pension) IRAs are for self-employed individuals who work as contractors, freelancers, and small business owners. They are designed to encourage these individuals to save and invest for retirement. Like traditional IRAs, SEP IRAs stick to the same taxation rules when it comes to withdrawing funds. Your maximum contribution however is limited to 25% compensation or $58,000 (as of 2021), whichever is the lower amount. 

Custodial accounts generally refer to a savings account held at a financial institution such as a bank, brokerage firm, or mutual fund company where a guardian keeps control over until the minor reaches adulthood (18 or 21 years old, depending on state laws). For transactions to be conducted, the custodian must approve them before they occur. While these accounts do not have tax deferment like traditional IRAs, custodian accounts are taxed at the child’s tax rate also known as “unearned income”. Custodian accounts are easily established and maintained, they also are allowed to invest into a variety of assets. But because these accounts are held under the minor’s ownership, it is seen as an asset and may reduce a child’s financial aid eligibility when applying for college.

A 529 savings plan will grow tax-deferred, and withdrawals are tax-free if they’re used for qualified education expenses. Prepaid tuition plans allow the account owner to pay beforehand for tuition at designated colleges and universities, locking in the cost at today’s rates. Custodian accounts have much more flexibility when it comes to flexibility in spending the funds. 529 plans, although provide more tax benefits, are required to be spent on tuition and school expenses such as tuition, fees, room, and board or other related costs. 529 plans are state-run and will have different rules. These accounts are required to be passed down to the minor when they reach adulthood, but because some do not seek higher education, a custodian account will allow them to make that choice when the time comes.