Use a traditional IRA or a Roth IRA to start saving for retirement, or to save even more.
Quick takeaways
There are all sorts of ways to save for retirement: 401(k)s, annuities, pensions, and, of course, individual retirement accounts.
Individual retirement accounts, or IRAs, are unique for a couple of reasons. First, there are two types: traditional IRAs and Roth IRAs. Second, both IRAs are set up by you, independent of where you work, so they travel with you as your employment changes. And, both types offer their own tax benefits and investment choices.
If you’ve decided you want to save in an IRA for retirement but aren’t sure what to do next, try these three straightforward steps.
The biggest difference between a traditional IRA and a Roth IRA is when you’ll enjoy the tax benefit.
- For a Roth IRA, it’s while you’re in retirement: You set up and fund the account with dollars you’ve already paid taxes on.
- For a traditional IRA, it’s before retirement: These accounts are created with dollars you haven’t yet paid income tax on (typically as a payroll deduction), helping reduce your taxable income. Then, you’ll pay income taxes on the funds when you withdraw them in retirement.
Your retirement-age tax bracket factors in your choice of savings, too. If it’s possible you’ll be in a lower tax bracket in retirement, a traditional IRA may make sense. If you may be in a higher bracket, a Roth IRA, with taxes already paid, may be a better fit.
One last consideration is how your modified adjusted gross income (MAGI) affects your eligibility to either open or contribute to a Roth IRA. What’s MAGI? Most of the time it’s the same as your adjusted gross income (found on line 11 of your IRS form 1040). If you have tax-exempt interest (line 2A of form 1040), nontaxable Social Security benefits, or foreign earned income or foreign housing exclusions, you’ll add those back in; that’s your MAGI. Above certain MAGI levels, you may not contribute to a Roth IRA.
| Roth IRA eligibility | MAGI to make a full contribution | MAGI to make a phased contribution |
|---|---|---|
| Single filers | <$150,000 | $150,000-$165,000 |
| Joint fliers | <$236,000 | $236,000-$246,000 |
Services, features, and cost all factor into your choice of an IRA provider. Key questions you can use include:
- Are there a wide range of investment options—stocks, bonds, mutual funds, annuities, bank products, etc.—to adapt to your changing needs?
- Can you access professional investment advice, if you want and need it, about which options are right for you now and in the future?
- Do you feel comfortable with the knowledge and accessibility provided to you for any questions you have?
- Is there ongoing education and support?
- What’s the provider’s reputation and history?
- What are the fees? Every IRA, both traditional and Roth, has fees based on an array of factors, and the fees you pay should provide the services and features you want and need.
Once you’ve chosen a provider, the process to open an IRA can probably be done by phone or online, or with the help of a financial professional. You’ll be asked for key details, whether your contribution is one-time or ongoing, and beneficiary information, among other information.
Each year, you can contribute up to $7,000, combined, to all of your IRAs—both traditional and Roth combined. If you’re age 50 or older, you’re allowed to contribute an extra $1,000, bumping your total yearly contribution to $8,000.
Once you’ve decided how much you’re able to save, you’ll have to choose your investments. An IRA often has many investment options—stocks, bonds, mutual funds, and exchange-traded funds, as well as bank products like CDs. Each option has different features, objectives, and levels of risk. This can seem overwhelming, but there’s are professionals, apps, and websites that can help you.
For starters, it’s helpful to understand what level of risk you’re comfortable with. Very often, people are more comfortable with risk (and the potential for greater reward) the more time they have for investments to grow and recover from any downswings. The reverse is also true: The closer you are to retirement, the less time you have for your accounts to build back up; that may mean your risk tolerance is less than someone else’s.
After you’ve assessed your risk tolerance, you’ll decide if you want help selecting and monitoring your accounts, or if you feel comfortable doing it on your own. If it’s the latter, you’ll need to figure out when you need to check in on your account for to-dos like rebalancing. If you’d rather have some assistance, and be more hands off, you may be able to pick investment options that rebalance automatically so you don’t have to do it yourself. Or, some providers may offer investment advice and other monitoring services (like rebalancing). These services could be provided by a financial professional or an asset manager, including a robo-advisor. You could also check in with a financial professional.
You can save in a 401(k), traditional IRA, and Roth IRA. How much could you and should you save in each of them? A financial professional can walk you through your options and help you put together a plan specific to your needs. Check with your HR contact to see if your company’s retirement savings plan offers financial professional services. Or, we can help you find one near you.
