It may be that a work sponsored retirement account is not an option for you. Or maybe it is but they don’t offer a match. Perhaps there aren’t a lot of good choices of fund options in the work sponsored plan. This is common.

If you have a work sponsored plan available and your company offers a match, you should absolutely take advantage of it. At least up to the match. Then you can look into other options to supplement your plan.

An IRA is an individual retirement account you can open on your own through a number of places. But remember, the more you do on your own, the less it will cost you in fees and maintenance. It’s worth it to educate yourself on the basics.

Opening an account

Opening an account is easy and you can do it on your own through companies like Vanguard, which seems to be the preferred place for most people in the FI (Financially Independent) community, or through Fidelity, another great option in the opinions of many, including mine.

Both offer a variety of accounts and low cost fund options, as well as educational information and advisors if you need them. I recommend educating yourself and making your own informed decisions.

Once you’ve opened an account, you will be able to make contributions by wiring money to it from your bank. This is easy. You just connect your bank and initiate a transfer whenever you want and in whatever amount you want (up to the limits, we’ll talk about that in a minute). You can make these transfers automatic or you can choose to do it on your own however often you want.

Both Traditional IRA’s and Roth IRA’s are similar in that, you make contributions and the money grows based on the types of investments you choose to purchase within the account. Let’s look at some of the key features of each.

Traditional IRA’s

• Potential earnings grow tax-free until withdrawn. Anything that happens within the account is not taxable until it is withdrawn.
• Contributions are made with pre-taxed dollars and are tax deductible if you meet certain income requirements.
• You will be required to take minimum distributions from the account starting at age 73. (This doesn’t mean you can’t withdraw earlier, but this is the longest you can hold the money in the account before the government will require you to make withdrawals and pay taxes on them)
• You pay taxes on the contributions as well as earnings as you make withdrawals.
• Withdrawals made before age 59 1/2 will be taxed and you will likely incur a 10% tax penalty with a few exceptions.
• Anyone over 18 can contribute to a Traditional IRA regardless of income, although there are income requirements that must be met for contributions to be tax deductible.

Roth IRA’s

• Potential earnings grow tax free forever.
• Contributions are made with after-tax dollars and are not tax deductible.
• There will never be required minimum distributions.
• Withdrawals of contributions are tax-free and penalty-free at any time for any reason.
• Withdrawals of earnings before age 59 1/2 may be taxable and incur a 10% tax penalty with a few exceptions.
• Anyone over 18 can contribute to a Roth IRA if they meet income requirements, which at the moment are, less than $153,000 if single, and less than $228,000 if married filing jointly.

Comparison

https://www.fidelity.com/retirement-ira/ira-comparison

	Traditional IRA	Roth IRA
Potential Earnings	Tax-Deferred until withdrawn	Tax-Free
Contributions	Pre-tax and tax deductible	After taxed and not tax deductible
Required minimum distributions	Starting at age 73	Never
Withdrawals	Taxed as withdrawn	Tax-Free forever
Income requirements	None	$153,000 Single or $228,000 Married filing jointly
Early withdrawal penalties	Taxable and 10% penalty	No penalty for withdrawal on contributions

Contributions Limits

There is a limit to how much you can contribute to IRA accounts and it changes per year. For the year 2024, the limit is $7,000. Note, this is not per account, this is across accounts. For example, if you have both types of accounts, you can only contribute a total of $7,000 between them.

These amounts are not affected by having 401(k) unless you have a pretty high income. If you’re not sure, you can use this calculator to find out.

Early withdrawal exceptions

For a Roth IRA, money you have contributed is always available to withdraw, tax-free and penalty-free, at any time and for any reason. This is because you have already paid taxes on this money.

But to withdraw earnings from a Roth IRA or any money in a Traditional IRA prior to age 59 1/2 without a penalty, it must be for a qualifying purpose such as a first time home purchase, a birth or adoption, some medical expenses, etc. For a full list of these qualifying events and limits you can go to this website.

Summary

Whether you have a 401(k) through your job or not, you should consider opening an IRA. Whether you choose a Traditional or Roth IRA is up to you and you should look at your own personal circumstances. The important thing is that you have a plan for your future.

As far as what investments you have in these accounts, that will be your choice as well. At both Fidelity and Vanguard, you will have the option to choose a portfolio that is managed for you, but with a little research and self education, you might just find that it’s not so hard to manage your investments yourself and avoid management fees altogether.

Keep coming back because the next few posts are going to be about investments.