Individual Retirement Accounts

For those without a retirement plan at work or those looking to maximize their retirement savings, an IRA provides an individualized saving option.

What Is an Individual Retirement Account?

An IRA (individual retirement account) is a retirement investment option available to anyone with earned income. You can open an IRA at most financial institutions, or through investment companies or brokerages. The funds invested in this account could either be overseen and managed by a brokerage house as a non-self-directed IRA or you can own and manage a broader range of assets yourself with a self-directed IRA.

Roth and Traditional

There are two main types of IRAs: Roth and Traditional. The main difference between the two is when you pay taxes. With a Roth IRA, you pay taxes on the money now and your investments grow tax-free. This means that when you withdraw the money in retirement, you won’t have to worry about paying any taxes.

With a traditional IRA, you won’t pay taxes until you withdraw the money in retirement. It’s likely that your tax bracket will change when you retire. If you move to a lower bracket, you’ll pay less in taxes than you would’ve now. If you move to a higher bracket, you’ll pay more. You also can’t know what tax rates will be when you retire, so it’s possible that they could be higher or lower than now, which means you’re taking a risk. The other benefit of a traditional IRA is that you may be able to deduct the money you contribute from your income in the year you contribute it, lowering the amount you’ll owe in taxes now.

The details of your eligibility for either type of account, how much you can contribute, and the deductions you can claim, are based mainly on your Modified Adjusted Gross Income, called your MAGI. Your MAGI is your income for the year without certain deductions you would take out for your AGI (adjusted gross income). This includes things like self-employment taxes, student loan interest, and more.

What are some advantages of an Individual Retirement Account?

Investing in an IRA allows you to have more control over how your money is invested. Not only that but both a Roth and a Traditional IRA include tax breaks either now or later.

Deductions

One major benefit of a traditional IRA is that you may claim a tax deduction for your contributions, lowering your tax bill now. Whether you can claim a deduction and how much is a bit complicated, so check these tables from the IRS for more specific details, but here’s a quick guide for 2024.

Filing Single

You are covered by a retirement plan at work:

• MAGI of $77,000 or less: full deduction up to your contribution limit
• MAGI of more than $77,000 but less than $87,000: partial deduction
• MAGI of $83,000 or more: no deduction

You are not covered by a retirement plan at work:

• Full deduction up to your contribution limit

Married Filing Jointly

You are covered by a retirement plan at work:

• MAGI of $123,000 or less: full deduction up to your contribution limit
• MAGI of more than $123,000 but less than $143,000: partial deduction
• MAGI of $143,000 or more: no deduction

You are not covered by a retirement plan at work, but your spouse is:

• MAGI of $230,000 or less: full deduction up to your contribution limit
• MAGI of more than $230,000 but less than $240,000: partial deduction
• MAGI of $240,000 or more: no deduction

You are not covered by a plan at work and neither is your spouse:

• Full deduction up to your contribution limit

Eligibility & Contributions

The only requirement to open a traditional IRA is that you (or your spouse if you are filing taxes jointly) earned income. The requirements for a Roth IRA are a bit more complicated. Whether you can contribute, as well as the amount you can contribute, is based on your MAGI. You can make a full contribution if your MAGI for 2024 is less than $146,000 as a single filer and $230,000 as a joint filer. The amount you can contribute is reduced the more you make and phases out completely at $161,000 for single filers and $240,000 for joint filers.

No matter what type of IRA you choose, there’s a limit to how much you can contribute in one year. The total IRA contribution limit for 2024 is the lesser of $7,000 ($8,000 if you’re over 50) or your full earned income. This includes a traditional and Roth IRA. So, if you have both, ensure that the two combined don’t go over the cap.

Spousal IRA

If one spouse is working and one is not, the working spouse may contribute to a spousal IRA in the non-working spouse’s name. This allows the non-working spouse to grow their own retirement income that they own, rather than relying only on income their spouse owns. The contribution limits are the same for a spousal IRA, and the accounts do not count against one another, meaning each person can contribute (or have contributed for them) up to the maximum.

Withdrawals

Because contributions to a Roth IRA are already taxed, you can withdraw them at any time without a penalty. The only downside is that the money will then stop growing and, if spent, you can’t use it in retirement. Earnings on your contributions are a bit more complicated. If you withdraw those funds before age 59 ½ or before the account is at least 5 years old, you may need to pay income taxes on it and a 10% early withdrawal penalty. Roth IRAs do not have RMDs (required minimum distributions) until you pass away, meaning it’s entirely up to you how much you withdraw and when while in retirement. Once you pass away, your beneficiaries need to withdraw funds from your account at regular intervals.

Any withdrawals made from a traditional IRA, whether from contributions or earnings, before the age of 59 ½ are subject to taxes and the 10% penalty. Once you reach 59 ½, though, you can withdraw as much as you want without penalty. Just remember you’ll owe income taxes on everything you withdraw. Once you turn 73, you’ll need to start taking RMDs from a traditional IRA. Your RMD is calculated by the IRS, and you’ll be penalized if you miss it.

There are exceptions to the 10% penalties on early withdrawals from both a Roth and traditional IRA. This includes withdrawals made because you are terminally ill or withdrawals under $10,000 that are used in a qualified first-time home purchase. For a full list of exceptions, check out the IRS website.

Investing Your IRA

One benefit of an IRA is more control over how money is invested than with a 401(k). You can usually choose between thousands of options, including CDs, treasury bills, savings bonds, stocks, and mutual funds. How you invest the money is up to you, which gives you increased flexibility to be as involved or hands-off as you would prefer.