Individual retirement accounts, known as IRAs, are designed to help investors save for retirement. Accounts are set up through a financial institution and are given special tax treatment by the IRS. Unlike a 401(k), an IRA is not tied to an investor’s employer.
Many savings vehicles are designed to help you prepare for one of the biggest financial goals you'll ever have – retirement. Whether this time is just around the corner or still a few years away, let's take a closer look at how individual retirement accounts (IRAs) might meet your needs.
IRAs help individuals save for retirement by investing in stocks, bonds, certificates of deposit (CDs), mutual funds and ETFs.
Only one person can own and contribute to an IRA. You and your spouse each can have one, but you can't share one.
Certain rules must be followed, and you may pay penalties if you take your money out before you reach a certain age.
These types of accounts are also given special tax treatment by the IRS. Unlike a savings account at a bank or a regular brokerage account, any growth inside a Traditional IRA is tax deferred.* In a Roth IRA, any growth is distributed tax-free.**
IRAs come in two forms and have different approaches to saving:
Traditional IRA – A Traditional IRA is a tax-deferred retirement account. You save today and are taxed when you withdraw the money.*
Roth IRA – In a Roth IRA, you don't get any tax deductions for the contribution today, but can withdraw the assets when you retire without paying taxes.** There's no age limit to contribute.
IRAs have a few additional differences, but your financial advisor can help you determine which savings vehicle best meets your needs.
401(k)s are pre-tax employer-sponsored retirement plans that are part of an employee's benefits package. Many employers will match your 401(k) contributions up to a certain percentage or dollar amount.
Conversely, you can open an IRA at most investment firms. These accounts are not tied to your employer and are transferable between institutions. IRAs may also allow you more flexibility in your investment choices, since you're able to choose the firm you invest with as well as the types of investments you prefer.
This isn't an either/or proposition. Opening both an IRA and 401k can be part of your retirement savings strategy. Discuss your options with a financial advisor.
Important Information:
*Early withdrawals are subject to ordinary income tax and a 10% penalty if you take a distribution before reaching age 59½.
**Earnings distributions from a Roth IRA may be subject to taxes and a 10% penalty if the account is less than five years old and the owner is under age 59½.
To learn more about IRAs in general or discuss holding your IRA.