IRA Basics: Your Personal Retirement Account

An IRA (Individual Retirement Account) is a tax-advantaged account you open and control yourself, separate from any employer. If you're serious about building wealth for retirement, understanding IRAs is essential.

Why IRAs Matter

Not everyone has access to a 401k. Even if you do, IRAs offer:

• More investment options than most 401(k)
• Lower fees (if you choose the right provider)
• Personal control over your retirement savings
• Additional tax-advantaged space beyond your 401(k)

Traditional IRA vs. Roth IRA

The two main types of IRAs differ in when you pay taxes:

Traditional IRA

Tax treatment: Contribute pre-tax, pay taxes when you withdraw

• Contributions may be tax-deductible (lowers your current tax bill)
• Money grows tax-deferred
• You pay taxes when you withdraw in retirement
• Required minimum distributions (RMDs) starting at age 73

Best for:

• You're in a high tax bracket now
• You expect to be in a lower bracket in retirement
• You want to lower this year's tax bill

Roth IRA

Tax treatment: Contribute after-tax, withdraw tax-free

• No tax deduction on contributions
• Money grows tax-free
• Qualified withdrawals in retirement are 100% tax-free
• No required minimum distributions

Best for:

• You're in a lower tax bracket now
• You expect higher taxes in retirement
• You want tax-free growth
• You're young and have decades for tax-free compounding

Which Should You Choose?

General guidance:

• Early career, lower income: Roth IRA (pay taxes now while in a lower bracket)
• Peak earning years: Traditional IRA (get the tax deduction while in a high bracket)
• Uncertain: Contribute to both for tax diversification

If you're young and just starting out, a Roth IRA is usually the right choice. You're likely in a low tax bracket now, and decades of tax-free growth is incredibly powerful.

Contribution Limits (2024)

• Under 50: $7,000 per year
• 50 and older: $8,000 per year (extra $1,000 "catch-up")

These limits are across all IRAs—if you have both Traditional and Roth, the combined total can't exceed the limit.

Income Limits for Roth IRA

Roth IRAs have income restrictions. In 2024:

• Single: Full contribution up to $146,000; phased out at $161,000
• Married filing jointly: Full contribution up to $230,000; phased out at $240,000

If you earn more than these limits, look into a "backdoor Roth IRA" (contribute to Traditional, then convert).

How to Open an IRA

1. Choose a provider: Fidelity, Vanguard, Charles Schwab, and similar brokerages offer excellent IRAs with low fees
2. Select Traditional or Roth: Based on your tax situation
3. Open the account: Usually takes 15 minutes online
4. Fund it: Transfer from your bank or set up automatic contributions
5. Invest: Choose your investments (target-date funds are simple and effective)

What to Invest In

Keep it simple:

• Target-date fund: Pick the year closest to your retirement (e.g., Target 2055). The fund handles everything.
• Total market index fund: One fund that tracks the entire U.S. stock market
• Three-fund portfolio: U.S. stocks, international stocks, bonds (more control, slightly more work)

Avoid: Individual stocks, actively managed funds with high fees, complex strategies when you're starting out.

IRA vs. 401(k): Which First?

Optimal order:

1. Contribute enough to 401(k) to get full employer match (free money)
2. Max out Roth IRA
3. Return to 401(k) and contribute more
4. Consider other accounts (HSA, taxable brokerage)

This order maximizes matching, tax advantages, and investment flexibility.

The Bottom Line

An IRA—especially a Roth IRA if you're young—should be part of everyone's retirement strategy. Open one today, set up automatic contributions, and let compound interest work for decades.