Retirement Accounts

What are Individual Retirement Accounts?

          Individual Retirement Accounts (IRAs) come in a variety of shapes and sizes, and it’s essential to know which one best meets your needs in order to be financially secure in your retirement. Unlike savings accounts, IRAs provide long-term savings/investment accounts that individuals with earned income can use to save for the future and enjoy certain tax advantages.

So what are all the available IRAs? Traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are the many types of IRAs. Each has distinct qualifying criteria, taxes, and withdrawal requirements.

Which IRA Suits You?

          Now that we understand what IRAs are and why they exist, let’s examine how their characteristics vary.  



Contribution (per year)

Required Minimum Distribution at 72

Traditional IRA

Income set aside lowers your current taxable income. Withdrawals in retirement are taxed at ordinary income tax rates.

For 2023,

Under Age 50: $6,500

Above Age 50: $7,500


Roth IRA

Contributions made with taxable income, but gains are exempt from further taxation once the account holder reaches 59.5.

For 2023,

Under Age 50: $6,500

Above Age 50: $7,500



Same as Traditional IRA, but setup by self-employed individuals like independent contractors, and small-business owners.

For 2023, the maximum allowed contribution is $66,000


Simple IRA

Similar to a Traditional IRA, but allows employee contributions and requires employer contributions as well.

For 2023,

Under Age 50: $15,500

Above Age 50: $19,000


Required Minimum Distribution – At age 72, holders of traditional IRAs are required to begin taking RMDs based on the size of their accounts and their life expectancy. Failure to comply may result in a tax penalty equal to 50% of the amount of the required distribution.

          The Traditional IRA and the Roth IRA are the two most popular IRAs. How to judge which account is best depends on the individual’s tax bracket when contributions are made versus when withdrawals are taken. Roth IRAs are ideal for those who anticipate withdrawing funds in a higher tax bracket than when they initially contributed. In contrast, with a traditional IRA, the individual anticipates withdrawals will be made when they are in the same or a lower tax bracket as when they made the contributions.  The graph below illustrates the typical employee’s career lifecycle with their tax rate.  For most employees, as they work further into their career they earn more.  This increase in earnings means they pay more income tax.  When your current income tax rate exceeds your anticipated retirement rate, it’s time to move from a ROTH IRA to a Traditional, SEP, or SIMPLE IRA.

Deducting IRA Contributions

Another important aspect is to determine if your IRA Contributions are tax-deductible. Only contributions to non-ROTH IRAs are deductible.  In order to determine how much, if any of your contributions are deductible, you’ll need to know your Modified Adjusted Gross Income (MAGI) and if you (or your spouse if you are married) are eligible for a retirement plan at work.

To determine the ability to deduct contributions will be based on your modified adjusted gross income (MAGI). Here is a handy chart to determine the deductibility of your contributions.  Start by selecting if you (or your spouse) are eligible for a retirement plan at work:

Eligible for Retirement
NOT Eligible for Retirement

Last but not least, it is important to be aware of the maximum Roth IRA contribution limits. Here are the numbers:

Filing Status



Singlehead of household, or married filing separately and you did not live with your spouse at any time during the year

< $138,000

$138,000 but < $153,000


Up to the Limit

Reduced Amount


Married filling separately and you live with your spouse at any time during the year

< $10,000

> $10,000

Reduced Amount


Married filing jointly or qualifying widow(er)

< $218,000

$218,000 but < $228,000


Up to the Limit

Reduced Amount


What Else Should I Know About IRAs?

          First, when should you make withdrawals from you IRA? After age 59 1/2 is the best time to withdraw from an IRA. In addition to taxes, you will incur a 10% early withdrawal penalty if you withdraw before age 59 1/2. There are exceptions to this penalty for medical expenses, disabilities, and other extraordinary life circumstances. In general, the longer you can wait before withdrawing funds, the more time they have to grow (which you can read more about here).

What if I have a 401k? 401(k) plans have higher contribution limits (except for the SEP), but anyone can open an IRA, regardless of whether their employer offers a 401(k) plan. The majority of 401(k) plans offer a limited selection of mutual funds and exchange-traded funds (ETFs), whereas a typical IRA provides a broader selection of funds, stocks, and other securities. However, employers typically match contributions, therefore if your company has a 401k match program, it is encouraged to contribute up to the match limit.

Lastly, just remember IRAs are intended for long-term retirement savings. If you withdraw money before retirement, you defeat the purpose by reducing your retirement assets. Consequently, money held in an IRA cannot typically be withdrawn before age 59 1/2 without incurring a hefty 10% penalty (in addition to normal taxes owed).

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