IRA (Individual Retirement Account)

Both options are a great way to save for retirement in a tax-advantaged way, but there are some pros and cons to each that you'll want to consider.

Contribution matching:

Many employers make a matching contribution for some or all of your 401(k) contributions, essentially giving you free money. The matching amount can vary and might need to vest over time—meaning you'd need to stay at the company for a certain amount of time before the matching funds become yours. With an IRA, you are the sole contributor.

Catch-up contributions:

If you're aged 50 or older, you get a larger catch-up contribution maximum than with an IRA. Roth IRA contribution limits are based on if your income level is below a certain amount. Remember, if you have both a traditional and Roth IRA that you contribute to, you can't contribute more than the limit across both accounts.

Investment options:

IRAs usually have more investment options than 401(k) plans, which are limited to the investment choices provided by your employer. With an IRA, you have more control over selecting investments that align with your financial goals and risk tolerance. However, a 401k may give you access to investment options not available to an IRA owner like a mutual fund with a lower expense ratio.

Find out more about the differences between a 401(k) and an IRA.

Both Traditional and Roth IRAs are a great way to save for retirement in a tax-advantaged way, but there are some drawbacks that you'll want to know about.

Tax deduction limits:

Traditional IRA contributions are made with pre-tax dollars, so the amount you contribute can be deducted from your income. But how much will depend on your level of income and whether your employer offers a retirement plan like a 401(k).

Early withdrawal penalties:

For Traditional IRAs, there are certain penalties if you take out your money before retirement age. This is typically 10 percent on top of the taxes owed for any withdrawals before age 59½ (there are exceptions like if you use the withdrawal to buy a home for the first time.) Roth IRA withdrawal rules allow you to take out your money at any time without paying taxes or fees. However, if you also pull out any investment gains, you might have to pay income tax and/or a 10 percent early withdrawal penalty on any earnings.

Want to learn more? Visit our retirement planning page to see more account options.

No matter if you do or don't have a retirement plan through work, a traditional or Roth IRA can be a great addition to your retirement savings strategy. Both are effective tools because they give you access to financial markets in a tax-advantaged way. However, there are limits on how much you can contribute based on your income, age, and filing status.

Many people add money to both a traditional and Roth IRAs. It's a common tax planning strategy for retirement that will help you manage the amount of income tax you pay. Here some key benefits of IRAs that can help you save for the retirement you want:

Tax advantages:

Contributions to traditional IRAs may be tax-deductible and any growth will either be tax deferred or tax free. A Roth IRA, on the other hand, is funded with after-tax dollars, but the withdrawals are tax-free in retirement.³

Compounding:

IRAs give your savings the opportunity to grow over time, thanks to compound interest. Even small, consistent contributions can add up. Growth in a traditional IRA is tax-deferred, while growth in a Roth IRA is tax-free.

More flexibility:

You can invest your savings in many different things, like stocks, bonds, mutual funds, ETFs, and categories. This will help diversify your portfolio and protect against market swings.

Whether it's a traditional or Roth IRA, the money in each account can grow and build wealth in several ways. And from a tax perspective, any growth will either be tax-free or tax deferred. Here's how it works:

Contributions:

You can consistently contribute a portion of your income to your IRA each year, up to the limits set by the IRS.

Investment gains:

The money in your IRA is invested in different things, like stocks, bonds, mutual funds, or ETFs. These assets have the potential to either grow in value or provide dividends over time.

Compounding:

If your investments earn money, you can leverage the power of compound interest. You can also use a tactic called dividend reinvestment programs (DRIPs) to accelerate growth. Instead of receiving cash dividends from a company, you use that money to purchase more shares or reinvest.

Inheriting an IRA can be life changing. The process can be complex, but you have a few options that are dependant on your relationship to the deceased.

Roll over the funds:

This option is only available if you're the spouse. You can transfer the funds from the inherited IRA into your IRA. This allows you to still make contributions, and any growth will continue to be tax-deferred.

Open an Inherited IRA:

This account is opened when you inherit an IRA after the original owner's death. There are complicated rules around the required minimum distribution (RMD), but you can generally withdraw the money right away and all the funds must be taken out by the end of the 10th year following the year the original owner died. You can't make more contributions, but any growth that occurs once you own the account will still grow tax deferred.

Take a lump sum:

You can cash out the entire amount of the IRA at once. But keep in mind, this can have significant tax implications.

No matter if you're married or not, you'll need to know the rules around required minimum distributions (RMDs) based on your life expectancy. An advisor can help you sort it all out.

You can, but there are certain rules you'll need to follow. The child needs to have earned income from a job like babysitting, lawn mowing, or working in a store—any type of work that generates income.

You can open either a custodial IRA or a custodial Roth IRA. A Roth IRA might be the better way to go, given that your child will most likely be in the lowest tax bracket. Plus, friends and family can contribute to the account in form of a gift (limits do apply). You'd be the custodian (i.e., you control the money in the IRA and make investment decisions) until your child takes charge of the account.