IRA Basics
Individual Retirement Accounts (IRAs) are tax-advantaged accounts you open yourself (separate from employer 401k). Both Roth and Traditional IRAs have a combined contribution limit of $7,000/year ($8,000 if 50+). The key difference is when you pay taxes.
Traditional IRA
- Tax benefit now — Contributions may be tax-deductible (depends on income and whether you have a workplace plan). $7,000 contribution at 22% bracket saves $1,540 in taxes today
- Taxed later — Withdrawals in retirement are taxed as ordinary income. You are betting your tax rate will be lower in retirement
- Required Minimum Distributions (RMDs) — Must start withdrawing at age 73. You cannot let it grow forever
- Best for — People in high tax brackets now who expect lower brackets in retirement. Those who need the immediate tax deduction
Roth IRA
- No tax benefit now — Contributions are after-tax. You do not get a deduction today
- Tax-free forever — All growth and withdrawals in retirement are completely tax-free. If you invest $7,000 and it grows to $50,000, you pay zero tax on the $43,000 gain
- No RMDs — No required withdrawals ever. You can let it grow your entire life and pass it to heirs
- Income limits — Cannot contribute directly if income exceeds $161,000 single / $240,000 married (2024). But backdoor Roth conversion is available
- Contribution withdrawal anytime — You can withdraw your contributions (not gains) at any time, tax and penalty free. Built-in emergency fund flexibility
- Best for — Young people in lower tax brackets, anyone who expects higher taxes in retirement, those who want tax-free income in retirement
Quick Decision Guide
- In your 20s-30s, lower income → Roth IRA. You are in a low bracket now, and decades of tax-free growth is incredibly valuable
- In your 40s-50s, peak earning → Traditional IRA (or Traditional 401k). Get the deduction at your highest tax rate
- Unsure about future taxes → Split between both. Having both traditional and Roth accounts gives you tax diversification in retirement — you can choose which to draw from based on your tax situation each year
- Already maxing 401(k) → Roth IRA as your next priority. It adds tax diversification to your predominantly pre-tax 401(k)