IRAs (Individual Retirement Accounts)
- A Tax-Free Way to Save: the Roth IRA
- The Traditional IRA
- Catch-Up Contributions
- Will My Contribution Be Deductible?
- The Traditional IRA vs. the Roth IRA
- What Type of Assets Can You Contribute to Your IRA?
- Setting up an IRA
- Investment Considerations for Your IRA
- When Is the Best Time to Contribute?
- Spousal IRAs
- Advantages and Disadvantages of IRA Accounts
- Rollovers to Your IRA
- Converting a Traditional IRA to a Roth IRA
- Roth IRA and 401(k)
- Choosing between the Roth IRA and Other Vehicles
- Roth IRA Conversions
Advantages and Disadvantages of IRA Accounts
Let's quickly review why an IRA makes sense, even though you may think it has some disadvantages:
- Connect with an IRA Specialist
- An IRA is a tax-advantaged savings vehicle for retirement.
- You have control over how your savings are invested. You can choose from individual stocks and bonds, mutual funds, or certificates of deposit—just to name a few choices.
- Your IRA funds are transferable. If you don't like where your IRA is invested, you can easily transfer the funds (see below).
- IRAs are easy to set up and maintain.
- You don't need permission to use your money.
- If you withdraw the money before age 59½, it is subject to ordinary income taxes plus a 10% tax penalty. Exemptions from penalties include death, disability, and taking substantially equal installments over your lifetime. Individuals may also make penalty-free withdrawals from IRAs for medical expenses in excess of 10% of adjusted gross income.
SUGGESTION: Penalty-free (and tax-free from Roth IRAs) withdrawals are allowed from IRAs for qualified first-time homebuyers up to a $10,000 lifetime limit. In addition, penalty-free withdrawals are allowed for qualified education expenses.
SUGGESTION: Under the rollover rules, you may withdraw money from an IRA temporarily and redeposit the full amount within 60 days in the same or a different IRA, qualified employer plan, 403(b) plan, or 457 plan without tax consequences. This provision can be an alternative if you need a short-term loan. But use this strategy with extreme caution. Generally, if you don't repay the loan within 60 days, you'll pay income tax and a 10% penalty on the amount borrowed, and you can't put the amount back into the IRA. Also, such rollovers may not be made more than once per year from each IRA (but an individual is not limited to the number of IRAs he or she may have). If you just want to transfer your IRA, and do not need to take possession of the funds, use a direct trustee-to-trustee transfer, which is easier and not subject to any frequency or time limitations. Your new trustee will handle the details and paperwork for you.
IMPORTANT NOTE: You cannot borrow against your IRA account as you can with a 401(k) plan. You also cannot use the account to secure a loan.
IMPORTANT NOTE: Unlike qualified retirement plans, the money you have in an IRA may not necessarily be protected from your creditors. Depending on state law, some courts have ruled that an IRA can be reached by creditors.
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FAQs
Typically, individuals benefit from saving for retirement in an IRA. However, whether a traditional or Roth IRA is better depends on several factors, including your income, age, and when you expect to be in a lower tax bracket—now or during retirement.
What are the advantages and disadvantages of IRAs? ›
Roth IRA pros and cons
| Roth IRA pros | Roth IRA cons |
|---|
| Not subject to required minimum distributions (RMDs) during your lifetime. | There is an income limit to contribute. |
| Contributions can be withdrawn at any time without penalty or taxes. | Earnings can't be withdrawn tax-free until age 59½ and the account is at least 5 years old. |
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Typically, individuals benefit from saving for retirement in an IRA. However, whether a traditional or Roth IRA is better depends on several factors, including your income, age, and when you expect to be in a lower tax bracket—now or during retirement.
What is the downside to a Roth IRA? ›
Income caps: Roth IRAs have income ceilings. If your earnings are high, you might not qualify. Limited contributions: The cap on yearly IRA contributions is substantially lower than the cap on yearly 401(k) contributions. Penalties on early withdrawals: You can withdraw your contributions tax- and penalty-free.
What are the limitations of an IRA? ›
How much can I contribute to an IRA? The annual contribution limit for 2023 is $6,500, or $7,500 if you're age 50 or older (2019, 2020, 2021, and 2022 is $6,000, or $7,000 if you're age 50 or older).
What is the risk with IRAs? ›
All investing is subject to risk, including the possible loss of the money you invest. When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
Are IRAs still worth it? ›
There are tax benefits, and your money has a chance to grow. Every little bit helps. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense. And if you have a 401(k), an IRA can help you build your nest egg faster.
Can an IRA go broke? ›
It is possible to lose money when you invest in a traditional or Roth IRA (Individual Retirement Account), depending on what investments you choose for your Roth.
What is safer than an IRA? ›
CDs are considered one of the safest investments available. A CD is as safe as a bank savings account, but it pays a little more interest in return for a commitment to keep the money in the bank for a set period.
Is my money safe in an IRA account? ›
Safety and security
Also, like regular IRAs, IRA CDs are federally insured up to $250,000 per depositor, per institution as long as you open one with an FDIC-insured bank or NCUA-insured credit union. This means your money is safe in the unlikely event the financial institution goes under.
You're never too old to fund a Roth IRA. The earlier you start a Roth IRA, the longer you have to save and take advantage of compound interest. Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances.
Which is better Roth or traditional IRA? ›
Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable as income. In comparison, contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free.
Who should not open a Roth IRA? ›
When to Not Open a Roth IRA. If you are in your peak earning years, you will be in a higher tax brackets, and your tax rate in retirement will likely be lower. In this case, you may be better off postponing the tax hit by contributing to a traditional retirement account.
What is the limitation on IRA account? ›
There are no income limitations to contribute to a non-deductible Traditional IRA, and the maximum contribution per year is $6,500 for tax year 2023 and $7,000 for tax year 2024 ($7,500 for tax year 2023 and $8,000 for tax year 2024 if you're age 50 or over).
Can an IRA lose value? ›
Despite the advantages, you can lose some or all of the money you put into a Roth IRA. One possible reason for a decline in the value of a Roth IRA is market volatility. Other losses can be attributed to early withdrawal penalties and investment fees.
Who Cannot have an IRA? ›
Income Limits for Roth IRAs
In 2024, individuals whose MAGI is $161,000 and above and married couples filing jointly whose MAGI is $240,000 and above in 2024 cannot contribute to a Roth IRA. Conversely, you can never contribute more to your IRA than your earned income in that tax year.
Which is safer, 401k or IRA? ›
The 401(k) plans are also better for high earners because they don't restrict the tax benefits. An IRA is better if your top priority is investment selection, and you don't want your retirement plan tied to an employer.
What are the cons of moving 401k to IRA? ›
Any Traditional 401(k) assets that are rolled into a Roth IRA are subject to taxes at the time of conversion. You may pay annual fees or other fees for maintaining your Roth IRA at some companies, or you may face higher investing fees, pricing, and expenses than you did with your 401(k).
Are IRAs high risk? ›
Investors should be mindful that investing through self-directed IRAs raises risks, such as fraudulent schemes, high fees, and volatile performance.
Do IRAs reduce taxable income? ›
IRAs are another way to save for retirement while reducing your taxable income. Depending on your income, you may be able to deduct any IRA contributions on your tax return. Like a 401(k) or 403(b), monies in IRAs will grow tax deferred—and you won't pay income tax until you take it out.
