Only 69 percent of workers reported that they or their spouse has saved for retirement, according the 2010 Retirement Confidence Survey. There’s no doubt that the sluggish economy is the primary reason for decreased savings, but could it be that retirement plan confusion plays a part as well? Here are the basics about the four most common types.

Traditional IRA


According to Thea Reynolds, financial planner and owner of WaterSeed Wealth Management in Naperville, Ill., funds contributed to a traditional IRA are considered before tax money in most cases. “Traditional IRA’s are good for everyone, regardless of employment,” says Reynolds. “A stay-at-home mom can put money into a traditional IRA under her own name.” Of course, contribution rules still apply, with contributions limited to $5,000 per year, $6,000 if the account holder is over 50. Traditional IRA owners should pay special attention to tax deductible amounts as they are greatly affected by income.


Simple IRA


A simple IRA is a good pick for small-business owners with lower incomes. Contributions up to $11,500 can be made each year, with another $2,500 allowed for those over 50. There are two components, an employee and an employer contribution. One item to note with simple IRA’s is that they must remain a simple IRA for two years. They cannot be rolled over or taken out without a 25 percent penalty and must be established by 10/1 of the current tax year.


SEP IRA (simplified employee plan)


“Opening a SEP IRA account makes a lot of sense for people who run their own business,” Reynolds says. “A SEP acts as another avenue that they could fund for retirement outside of a Roth or traditional IRA.” Business owners must have a sole proprietorship, S or C-corporation to open a SEP account, which can be done through 4/15 of the current year for deductions in the previous tax year. Ideally, corporations with just one employee will choose a SEP, because the same percentage must be matched for all employees that make over $550 annually. Contributions are capped in 2010 at a maximum of 25 percent of yearly earnings or $49,000, with an extra $5,500 allowed for those age 50 and up. 


Roth IRA


Just like traditional IRAs, Roths maximize contributions at $5,000 per year ($6,000 if you’re 50 or older). Roth contributions are considered after tax monies and don’t involve a deduction on income tax.  In contrast to other IRAs, contributions made to a Roth come out tax free after remaining in your account for a specified amount of time. Because Roths don’t carry requirements for mandatory distributions once account owners reach 70.5 years old, Reynolds feels that these accounts are a wonderful thing to pass along to kids. One thing to note: High-income earners are restricted from opening Roth accounts, so check with your accountant for more information.


Molly Logan Anderson is a freelance writer who lives in the western suburbs of Chicago with her husband, Mike, three kids and two labs. Join Molly on her family’s journey of living a frugal life and making financial freedom their reality in her columns and on her blog, www.butterfliesandmudpies.blogspot.com.