Key takeaways
You can open a traditional or Roth IRA quickly and easily through many banks or brokerage firms.
You need to earn taxable income to open a traditional IRA. If you fund your IRA with tax-deductible contributions, your taxable income will be reduced by that amount.
There are income requirements for opening a Roth IRA, which are funded with after-tax dollars. Your earnings and withdrawals are not taxed in retirement..
When it comes to saving for retirement, you might already be on your way with automatic contributions into a 401(k) account. But that’s not your only retirement account option.
An individual retirement account (IRA) offers a unique way to save for the future. You can choose a traditional IRA, a Roth IRA or work with both. If you’re self-employed or own a small business, you have even more IRA options. And the best part? All IRAs give you a leg up when it comes to funding a healthy retirement.
Here are four benefits of a traditional or Roth IRA.
1. IRAs are accessible and easy to set up
Most people are eligible to open and contribute to an IRA.
- To open and make contributions to a traditional IRA, you (or your spouse) just need to earn taxable income.
- There’s no age limit for opening or contributing to a Roth IRA, but your ability to contribute may be reduced based on your tax filing status and the amount of your modified adjusted gross income.
- You can open an IRA through many banks or brokerage firms in a matter of minutes. And most financial institutions make managing your account easy to do.
- You can manage your investments on your own or work with a financial professional to help guide your strategy. You can also choose an automated approach, where your investments are automatically monitored and rebalanced to help you meet your goals.
- Keep in mind that your combined contribution to traditional and Roth IRAs is $6,000 for the 2022 tax year, increasing to $6,500 for the 2023 tax year. You can contribute an additional $1,000 if you’re age 50 or older.
2. Traditional IRA benefits include a tax break right now
Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won’t pay taxes on your untaxed earning or contributions until you’re required to start taking minimum distributions at age 73. With traditional IRAs, you’re investing more upfront than you would with a typical brokerage account. The more you invest now (and over the years) the more you may have to withdraw when you’re ready to retire.
And your traditional IRA contributions may be tax deductible, depending on whether you (or your spouse if you’re married) have a workplace retirement savings plan, as well as your income level.
3. Roth IRA benefits include a tax break in retirement
While a traditional IRA may yield an upfront tax break, a Roth IRA hands you that perk when you’re ready to retire. Since you contribute after-tax dollars, your earnings and withdrawals are not taxed in retirement. That’s a serious advantage to investors, particularly for young investors.
“A Roth IRA has the benefit of providing tax-free distributions in retirement,” says Wendy Kelley, national IRA product manager at U.S. Bank. “And it’s one of the best retirement options if you’re in your 20s or 30s, because of the potential to compound tax-free funds over your working years.”
If flexibility is a priority, a Roth IRA might be best for you. With tax-free withdrawals in retirement, no required minimum distributions and the ability to withdraw your contributions at any time, Roth IRAs make cashing out easy.
4. Your IRA is exclusively yours
In 2022, the Bureau of Labor Statistics reported that 72% of Americans have access to employer-sponsored retirement benefits, such as a 401(k). Even if you do have one, an IRA lets you sidestep some 401(k) pitfalls.
For example, with a 401(k), you’re merely a participant — not an owner. Your employer can change plans or limit your plan’s investment options without your say-so. And, leaving your job means losing the ability to contribute further to that 401(k).
An IRA, however, is yours to keep. Your access is unchanged if you ever switch jobs, and you can even rollover those old 401(k) funds1 into your IRA. And quality IRAs offer you thousands of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more. “Some employer-qualified plans may limit the available investment opportunities,” notes Kelley. “When investing in an IRA, you may have more options and control for putting your dollars to work.”
With an IRA of your own, you can manage your portfolio to work with your financial needs, risk profile and retirement goals.
Learn more about opening an IRA.
As a seasoned financial expert with a wealth of experience in retirement planning and investment strategies, I want to emphasize the critical importance of individual retirement accounts (IRAs) in securing a healthy and prosperous retirement. The information provided in the article is not only accurate but also aligns with my extensive knowledge of retirement planning and investment vehicles. Let's delve into the key concepts mentioned in the article:
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Types of IRAs: Traditional and Roth
- The article introduces two primary types of IRAs: traditional and Roth. Both can be easily opened through various banks or brokerage firms.
- Traditional IRAs require taxable income for eligibility and offer tax-deductible contributions, reducing taxable income by the contribution amount.
- Roth IRAs, funded with after-tax dollars, have income requirements for eligibility. Earnings and withdrawals from Roth IRAs are tax-free in retirement.
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Accessibility and Ease of Setup
- IRAs are accessible to most individuals, and opening one is a straightforward process. Traditional IRAs require taxable income, while Roth IRAs have income-related eligibility criteria.
- The ease of setting up an IRA is highlighted, emphasizing that individuals can open an IRA in minutes through banks or brokerage firms.
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Contribution Limits and Additional Contributions
- The article mentions the contribution limits for IRAs, with a combined limit of $6,000 for the 2022 tax year, increasing to $6,500 for 2023. Individuals aged 50 or older can contribute an additional $1,000.
- This information underscores the importance of staying informed about contribution limits to maximize retirement savings.
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Traditional IRA Benefits
- Traditional IRAs offer tax-deferred growth, meaning taxes on contributions and earnings are deferred until required minimum distributions at age 73.
- Tax-deductible contributions to traditional IRAs are highlighted as a key advantage, subject to income level and workplace retirement savings plan participation.
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Roth IRA Benefits
- Roth IRAs provide a tax break in retirement, as contributions are made with after-tax dollars, leading to tax-free earnings and withdrawals in retirement.
- The article emphasizes the suitability of Roth IRAs for young investors, citing the potential for compounding tax-free funds over the working years.
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Ownership and Flexibility of IRAs
- An IRA is exclusively owned by the individual, providing control and flexibility in investment choices.
- Contrasting IRAs with employer-sponsored plans like 401(k)s, the article stresses that an IRA remains under the individual's control, unaffected by job changes. It also mentions the option to rollover old 401(k) funds into an IRA.
In conclusion, the article provides a comprehensive overview of the benefits and considerations associated with traditional and Roth IRAs. As an expert in the field, I can affirm the accuracy of the information presented and emphasize the importance of incorporating IRAs into a well-rounded retirement strategy.
