My friend, Lori, asked for my help figuring out which IRA to start.  She qualifies for a regular IRA, a ROTH, and a SEP.  She could also start a 403b. 

Lori had a heck of a time finding a comparison on the web.  So, here’s what I told her:  the real key to each program is how much you end up paying in taxes.  A secondary consideration is the penalty for early withdrawal. 

First, if you get matching funds on a 403b or 401k, you should totally do that up to the maximum match.  For instance, my sister’s company matches up to $6,000/yr, so she contributes exactly $6,000, and gets $12,000 annually into her 401k.  Side note:  $12,000 is roughly 20% of my sister’s annual income, and she feels like that’s enough to save for retirement.  I sock away 30% myself, but I also make less than she.

In the cases of the regular IRA, SEP-IRA, and 403b (or 401k), you contribute tax-free money, but, pay taxes on the contributions PLUS the profit at withdrawal (retirement).  You also pay penalties for early withdrawals, and/or may have to pay back the money you take out.  And, in Lori’s situation, the company does not match funds in the 403.

I suggested she go with the ROTH.  In a ROTH, you contribute taxed money, but, when you withdraw the money at retirement, you don’t pay ANY taxes.  So, all your profit is completely tax free!  You will have paid less taxes overall than you would with the regular IRA or SEP-IRA.  You can also withdraw your contributions (but not the profit) at anytime, for any reason, no penalty.  The contribution and income limits for a ROTH have some complexity, but, basically, you can start a ROTH if you  make under $116,000 per year, and the maximum contribution is $5,000/yr.  It's great for those who are starting out.

RECAP:
IRA, SEP-IRA, 403b or 401k:  taxes on contributions and growth, penalties to withdraw.  Matching funds in the 403 or 401 would be worth it.

ROTH-IRA:  taxes on contributions only, no penalty to withdraw contributions.