Retirement is an important goal of most individuals. Individuals who are self-employed or employed by small businesses have access to unique retirement plans that can help them reach their retirement goals. It is important that individuals understand and use the investment vehicles available to them.

Because of the Taxpayer Relief Act of 1997, there are now three main types of individual retirement accounts (IRAs): the traditional IRA, the Roth IRA, and the education IRA. In addition to these three main types of IRAs, there are many other types of IRAs that you should learn about as you prepare for retirement.

A traditional IRA is a retirement account in which you can contribute up to $4,000 each year (in 2007) if you are under age fifty; if you are over age fifty, you may contribute $5,000 in 2007 (see Table 30.1). This account may or may not be tax deferred, depending on your income level and whether or not you are a participant in another employer-sponsored retirement plans (ESRP). To contribute to a traditional IRA, you must be younger than seventy and a half, and you must have earned income yourself or you must be the spouse of someone who has earned income. Contributions to a traditional IRA are tax deductible if you meet certain conditions.

A Roth IRA is a type of individual retirement plan in which your contributions are made with after-tax dollars. Because you make contributions with after-tax dollars, your contributions are not tax deductible. However, this plan provides a unique benefit that is not available with any other retirement plan: all earnings and capital gains are tax free when you or your beneficiaries make withdrawals at retirement.

An education IRA is an investment tool you can use to prepare for the cost of your children’s education. You can set up a separate IRA for each child and make contributions into these accounts until the children reach age eighteen. The annual contribution limit for education IRAs in 2007 is $2,000 per child; your total contributions into different accounts can equal no more than $2,000 per child. These contributions and their earnings can be withdrawn tax free if they are used to pay for qualified educational expenses related to enrollment at eligible elementary, secondary, post-secondary, and higher educational facilities.

In addition to the traditional IRA, Roth IRA, and education IRA, there are a number of other IRAs that you should learn about. These IRAS include following: the spousal IRA, nondeductible IRA, individual retirement annuity IRA, employer and employee association trust account IRA, rollover IRA, inherited IRA, simplified employee pension IRA (SEP-IRA), and savings incentive match plan for employees IRA (SIMPLE-IRA).

The decision of whether you should invest in the traditional IRA or the Roth IRA can mainly be based on five factors: (1) your need to reduce current taxes with tax deductions; (2) your anticipation of tax rates when you retire; (3) your availability of money to pay the necessary taxes on the Roth IRA; (4) your need for investment flexibility; and (5) your need for estate planning to transfer assets to your heirs.

Just as there are retirement plans available to employees of large businesses, there are also retirement plans available to employees of small businesses and individuals who are self-employed. These plans have some of the same tax advantages as the plans available to larger businesses, and some of these plans are even more generous. Some of these plans allow you to invest even if you already have another retirement plan through another employer. For example, if you are self-employed, either full- or part-time, or if you work for a small business, you can invest money in a simplified employee pension plan (SEP-IRA), a Keogh plan, or a new savings incentive match plan for employees (SIMPLE).

There are two categories of small-business retirement plans. The first category includes plans funded by the small-business employer, for example, SEP-IRAs and Keogh plans. The second category includes plans funded by both the small-business employer and the employee: mainly the SIMPLE IRA and SIMPLE 401(k) plans.

Now that you have completed this section, ask yourself the following questions:

1. Can you describe individual retirement accounts?
2. Can you explain when it is beneficial to convert a traditional IRA to a Roth IRA?
3. Can you describe retirement plans designed for small businesses and individuals who are self-employed?