An individual retirement account, or IRA, is a specialized type of investment account. IRAs are designed to help people save and invest for retirement. Unlike 401(k)s and other employer-sponsored retirement plans, IRAs — or individual retirement accounts — can be set up by individuals over the age of 18 who have earned income. There are two main types of IRAs: traditional IRAs and Roth IRAs.
A traditional IRA is a tax-advantaged retirement account where your contributions may be tax-deductible, and your investments grow tax-deferred until you make withdrawals in retirement. Contributions to a traditional IRA are typically made with pre-tax dollars. This means that you can deduct the amount of your contribution from your taxable income for the year in which you make the contribution.
Roth IRAs are simpler, in a sense, because they don't offer an immediate tax deduction. You pay taxes on your money upfront, deposit it in the account, and then your investments grow tax-free. When you withdraw money in retirement, you won't owe any taxes on the contributions or earnings, as long as you meet certain requirements.
Most of us would prefer not to pay up-front for anything that could be paid for at a later time. That is true for paying income taxes on traditional IRAs. However, the tax benefits of a traditional IRA can be significant, especially if you expect to be in a lower tax bracket in retirement.
Opening an IRA account is a great way to save for retirement. Bankrate has found the best IRA accounts to help you start saving today. When choosing between a traditional IRA and a Roth IRA, it's important to consider your current tax situation, your retirement goals, and how you expect your tax situation to change in the future.
What to know about contributing to both a traditional IRA and Roth IRA, and one brand new place to move unused funds. It's also important to understand the contribution limits for each type of IRA and how they interact with each other. For example, if you have a traditional IRA and a Roth IRA, your total contributions to both accounts cannot exceed the annual limit set by the IRS.
A backdoor Roth IRA is a completely legal strategy to avoid the Roth's income limits. Backdoor Roth IRAs are really just a conversion, where you contribute to a traditional IRA and then convert it to a Roth IRA. This can be a useful strategy for high-income earners who are not eligible to contribute directly to a Roth IRA due to income limits.
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