What is an IRA?
An Individual Retirement Account (IRA) is a tax-advantaged investment account designed to help you save for retirement. There are two main types of IRAs: Traditional and Roth, each with different tax benefits and rules.
Traditional IRA
- Contributions may be tax-deductible
- Earnings grow tax-deferred
- Withdrawals in retirement are taxed as income
- Required minimum distributions start at age 72
Roth IRA
- Contributions are made with after-tax dollars
- Earnings grow tax-free
- Qualified withdrawals in retirement are tax-free
- No required minimum distributions
Our IRA Calculator helps you estimate how your retirement savings may grow over time and compare the potential tax advantages of Traditional and Roth IRAs based on your personal situation.
IRA Calculator
Understanding IRAs: Maximizing Your Retirement Savings
Contribution Limits
For 2023, you can contribute up to $6,500 to your IRAs. If you're age 50 or older, you can make an additional catch-up contribution of $1,000, for a total of $7,500. These limits apply to the total of your Traditional and Roth IRA contributions (you cannot contribute the maximum to both types).
Traditional vs. Roth IRA: Which is Right for You?
The choice between a Traditional and Roth IRA depends on several factors:
Choose a Traditional IRA if:
- You expect to be in a lower tax bracket in retirement
- You want to reduce your current taxable income
- You want immediate tax benefits
- You can deduct your contributions from your taxes
Choose a Roth IRA if:
- You expect to be in a higher tax bracket in retirement
- You prefer tax-free withdrawals in retirement
- You want to avoid required minimum distributions
- You want the flexibility to withdraw contributions without penalties
The Power of Compound Interest
One of the most important factors in growing your retirement savings is time. The earlier you start, the more your money can benefit from compound interest. Even small contributions made consistently over many years can grow significantly.
For example, if you start saving $500 per month at age 25 with a 7% annual return, you could have over $1 million by age 65. But if you wait until age 35 to start, you might only accumulate about $500,000 by age 65—half as much!
Retirement Savings Tips
- Start early and contribute consistently
- Take advantage of employer matches in workplace plans
- Consider diversifying your retirement portfolio
- Increase your contributions when you get raises
- Review and adjust your retirement strategy periodically
- Consider consulting with a financial advisor for personalized advice
Frequently Asked Questions
Can I contribute to both a Traditional and Roth IRA?
Yes, you can contribute to both types of IRAs in the same year, but your total contributions cannot exceed the annual limit ($6,500 for 2023, or $7,500 if you're 50 or older).
Are there income limits for IRA contributions?
There are no income limits for contributing to a Traditional IRA, but there are income limits that may affect your ability to deduct contributions. Roth IRAs have income limits that determine eligibility for contributions. For 2023, the ability to contribute to a Roth IRA begins to phase out at $138,000 for single filers and $218,000 for married filing jointly.
When can I withdraw money from my IRA?
For Traditional IRAs, you can start taking penalty-free withdrawals at age 59½. Required minimum distributions (RMDs) begin at age 72. For Roth IRAs, you can withdraw your contributions (but not earnings) at any time without penalties. Earnings can be withdrawn penalty-free after age 59½ if the account has been open for at least five years.
What happens if I withdraw from my IRA before retirement age?
Early withdrawals (before age 59½) from a Traditional IRA generally incur a 10% penalty plus income tax. However, there are some exceptions for first-time home purchases, qualified education expenses, and certain other situations. For Roth IRAs, you can withdraw contributions (but not earnings) at any time without penalties.
Can I have an IRA if I have a 401(k) through my employer?
Yes, you can contribute to both an IRA and a 401(k). However, if you or your spouse are covered by a workplace retirement plan like a 401(k), your ability to deduct Traditional IRA contributions may be limited depending on your income.