IRA (Individual Retirement Account)

Traditional vs. Roth

Two main IRA types:

• Traditional IRA — contributions may be tax-deductible (subject to income limits if covered by workplace retirement plan); growth is tax-deferred; withdrawals in retirement taxed as ordinary income.
• Roth IRA — contributions are made with after-tax dollars; growth is tax-free; qualified withdrawals in retirement are entirely tax-free.

The choice between them is essentially a bet on whether your tax rate will be higher in retirement (favor Roth) or lower (favor traditional). Most workers benefit from having some of each across their retirement-saving life.

2025 contribution limits

• Standard limit: $7,000.
• Catch-up (age 50+): additional $1,000.
• Combined across all IRAs, not per-account.

Roth IRA contributions phase out at higher income levels (singles around $146-$161K MAGI for 2025; married joint around $230-$240K). Traditional IRA contributions are unlimited regardless of income, but deductibility phases out for those covered by workplace plans.

Why IRAs matter

Even with workplace retirement plans, IRAs add value:

• Roth IRA — tax-free growth and withdrawals; not commonly available through workplace 401(k)s except via Roth 401(k) option.
• Investment flexibility. IRAs typically have unlimited investment options vs. workplace plans' limited menus.
• No fees in self-directed IRAs at major brokerages (Vanguard, Schwab, Fidelity).
• Backdoor Roth — high earners use Traditional-then-Roth conversion to access Roth treatment despite income limits.

Distributions

For Traditional IRAs:

• Required Minimum Distributions (RMDs) begin at age 73 (rising to 75 for younger cohorts).
• Early withdrawal penalty (10%) below age 59½, with exceptions for first-home purchase, education, medical expenses.
• Tax owed on traditional withdrawals; not on Roth.

For Roth IRAs:

• No RMDs during the original owner's lifetime.
• Contributions can be withdrawn anytime tax- and penalty-free.
• Earnings subject to 5-year rule and age 59½ for fully tax-free withdrawal.

Where to open

Major brokerages offer IRAs with no fees:

• Vanguard, Schwab, Fidelity — all offer no-fee IRAs with broad investment options.
• Robo-advisors (Betterment, Wealthfront) — managed portfolios with target allocations.
• Self-directed IRAs at specialized custodians — for non-traditional assets (real estate, crypto, private equity). More expensive and complex.

Common strategies

A few patterns:

• Max IRA every year. $7K isn't a fortune but compounds significantly.
• Roth ladder for early retirees — convert Traditional to Roth gradually in low-income years; access converted amounts after 5 years tax-free.
• Backdoor Roth for high earners.
• Mega backdoor Roth through 401(k) plans that allow after-tax contributions and in-plan Roth conversions.

For most workers, contributing to a workplace 401(k) up to match plus maxing a Roth IRA captures the highest-leverage tax-advantaged saving available.