12/05/2024
IRA's 101 - What You Need To Know
Individual retirement accounts (IRA's) are tax-advantaged investment accounts that help individuals save for retirement. The money you put into an IRA is used to invest in stocks, bonds, and other assets. Anyone who earns an income—regardless if they are full-time, part-time, or a contractor—can open and invest in an IRA.
IRAs are often good solutions for people who don’t have the option to invest in a 401(k) or for those who want to put even more money aside for retirement. Depending on the type of IRA someone gets, they will either have access to a tax-deferred or tax-free withdrawal account.
Traditional IRAs vs. Roth IRAs
Traditional IRAs are tax-deferred—meaning you’ll pay taxes when you withdraw funds during retirement, rather than before you invest in the IRA. Traditional IRAs have no gross income limits. Plus, you can typically deduct traditional IRA contributions from your taxes.
To invest in a Roth IRA, you must contribute money that’s already been taxed—meaning that during retirement, you won’t pay any taxes when you make withdrawals. Plus, unlike other types of IRAs, Roth IRAs don’t require you to withdraw a certain amount of cash per year during retirement. However, you have to earn under a certain gross amount per year to be eligible for a Roth IRA.
In 2024, and for 2025, the contribution limit for both traditional and Roth IRAs is $7K and $8K for people aged 50 or older.
If your Modified Adjusted Gross Income (MAGI) is over a certain threshold ($146K for single individuals and $230K for married couples for 2024; $150K for single individuals and $236K for married couples for 2025) you technically aren’t eligible to contribute to a Roth IRA. But many high earners use a loophole called a backdoor Roth IRA to get in on this tax-advantaged account.
The backdoor method works by using already taxed money to set up a traditional IRA, then immediately converting the account into a Roth IRA before the money has time to make any gains. People who do this won’t have to pay taxes on the conversion since the money initially invested into the traditional IRA isn’t tax deductible.
Other Types of IRAs
Other types of IRAs include SEP IRAs and SIMPLE IRAs, which are both retirement accounts designed for self-employed workers and small-business owners.
In 2024, SEP IRAs have a contribution limit of either 25% of your income or $69K ($70K for 2025), whichever is less. With SEP IRAs, individuals can’t contribute; only their employer is allowed to contribute.
SIMPLE IRAs allow employees to contribute to this tax-deductible account and require their employers to contribute as well. For 2024, they have an employee contribution limit of $16K ($16,500 for 2025).
Limitations
Although most middle- and lower-class Americans are eligible to open and invest in multiple IRAs, investors are capped at a contribution limit per year for the total sum of all their accounts. For example, if you invest $5K in a Roth IRA, you can only invest an additional $2K in a traditional IRA per year. Plus, since IRAs are intended for retirement, if you pull your money out before age 59½ you could pay a 10% penalty fee.
Next Steps
Want to discuss this is more detail? Schedule a Consultation Call or Web Meeting so we can review your options: https://calendly.com/rerogers
