Types of individual retirement accounts: Your guide to traditional, Roth, SEP, and SIMPLE plans

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Choosing the right IRA starts with understanding the differences.

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An individual retirement account (IRA) is a tax-advantaged way to boost your retirement savings. As an extra benefit, your investment choices might be more varied than what you’d find in an employer-sponsored 401(k) plan. There are different types of IRAs, though. Some are available to anyone with earned income. Others are accessible only to small business owners and their employees.

Traditional, Roth, SEP, and SIMPLE IRAs differ in who can contribute, how they’re taxed, and how much can be saved each year.

In general, contributions to a traditional IRA may be tax deductible. Whether you can deduct them depends on your income and whether you or your spouse participate in a workplace retirement plan.

With few exceptions, you can’t begin withdrawing money penalty free until you’re 59½. If you take money out before then, you’ll generally owe a 10% early withdrawal penalty in addition to ordinary income taxes.

A Roth IRA allows you to pay taxes on contributions today in exchange for tax-free withdrawals in retirement. For those who expect to be in a higher tax bracket later in life, a Roth can be an attractive option.

Another benefit of a Roth IRA is that you can generally withdraw your contributions—but not investment earnings—at any time without taxes or penalties. With few exceptions, you must be at least 59½ to withdraw earnings without penalty. For example, if you contributed $30,000 to a Roth IRA and the account grew to $50,000, you could generally withdraw the original $30,000 without penalty. Accessing the remaining $20,000 in earnings before age 59½ may trigger taxes and a 10% early withdrawal penalty.

You can contribute to both a traditional and a Roth IRA, but the total you contribute to all your IRAs can’t exceed the annual limit.

A SEP IRA is commonly used by self-employed individuals and small business owners. It’s a relatively easy way to prepare for retirement or provide a retirement plan for employees.

The maximum SEP contribution is 25% of your business’s net income (after deducting half of your self-employment tax and contributions to your own SEP). Business owners must contribute the same percentage of compensation to eligible employees that they contribute to their own SEP-IRA accounts. For example, if you contribute 15% of your business’s net income to your own SEP IRA as a business owner, you must also contribute the same percentage to each of your employees’ retirement accounts.

SEP-IRA contributions are separate from traditional and Roth IRA contribution limits, which means you may be able to contribute to both.

The SIMPLE IRA allows small businesses to offer a retirement plan to employees. In general, SIMPLE IRAs are available to businesses with 100 or fewer employees. The employer can choose to match up to 3% of employees’ contributions dollar for dollar, or make nonelective contributions of up to 2% of the employees’ income, without the requirement that the employees also contribute.

Employees who contribute to multiple employer-sponsored retirement plans, including 401(k)s, may be subject to overall IRS contribution limits.

Like SEP IRAs, SIMPLE IRAs may also be structured as Roth accounts under the SECURE 2.0 Act.

Traditional, Roth, SEP, and SIMPLE IRAs each feature different tax advantages, contribution rules, and eligibility requirements. Choosing the right account depends on factors such as your income, employment status, and whether you prefer a tax break today or in retirement.

In some cases, it may be possible to contribute to more than one type of IRA, allowing you to tailor your retirement savings strategy to your needs.