An Individual Retirement Account (IRA) is one of the most popular retirement savings options.
It allows individuals to set aside funds for retirement through a financial institution, such as a
bank or brokerage firm, where the money can be invested in stocks, mutual funds, bonds, and
cash.
The IRS imposes annual contribution limits for IRAs and determines how the funds are
taxed—or shielded from taxation—depending on the type of IRA. This affects both deposits and
withdrawals.
Main Advantages of IRAs
- Control Over Investments: You can choose the financial institution and make
investment decisions yourself, or hire a professional to manage them for you. - Flexible Tax Benefits: Depending on whether you select a Roth or traditional IRA, you
can determine how and when you receive tax advantages based on your eligibility. - Broad Investment Choices: IRAs typically offer a greater variety of investment options
compared to workplace retirement plans. - Tax Diversification: If eligible, you can contribute to both a Roth and traditional IRA in
the same year, as long as your total contributions remain below the combined limit. This
strategy can provide tax diversification in your retirement portfolio.
Main Disadvantages of IRAs
- Lower Contribution Limits: Compared to 401(k) plans, IRAs have lower annual
contribution limits:- 2024: The maximum contribution is $7,000, with an additional $1,000 catch-up
contribution for those aged 50 or older. Contributions for 2024 can be made until
the April 2025 tax filing deadline. - 2025: The limits remain the same ($7,000, plus a $1,000 catch-up for those 50+).
In contrast, 401(k) plans allow up to $23,500 in contributions ($31,000 for
individuals 50 and older).
- 2024: The maximum contribution is $7,000, with an additional $1,000 catch-up
- Income Limits for Roth IRAs: Roth IRA contributions begin to phase out based on your
modified adjusted gross income (MAGI):- 2024: The phase-out starts at $146,000 for single filers and $230,000 for married couples filing jointly.
- 2025: These thresholds increase to $150,000 for single filers and $236,000 for joint filers.
- Traditional IRA Deduction Limits: While anyone can contribute to a traditional IRA
regardless of income, the ability to deduct contributions may be restricted if you or your
spouse are covered by a workplace retirement plan. - Tax Strategy Uncertainty: Choosing between a Roth and traditional IRA often requires
predicting your future tax situation. If you prefer an immediate tax deduction, a
traditional IRA might be better. If you want tax-free withdrawals in retirement, a Roth
IRA could be the clear choice. Comparing the two options carefully is essential for
making the best decision.
