IRAs

Background

Individual retirement accounts 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) (more on 401(k) plans here)—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. See if you’re eligible for a deduction based on your MAGI (your modified adjusted gross income after any deductions) and other retirement plans here.

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. Find out if a Roth IRA is right for you here.

In 2024, the contribution limit for both traditional and Roth IRAs is $7K and $8K for people aged 50 or older.

In 2024, if your MAGI is over a certain threshold ($146K for single individuals and $230K for married couples) 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, 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. They have an employee contribution limit of $16K.

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. Learn about exceptions to this rule here.