As we approach April 15th, you will see an uptick in the flow of information surrounding IRAs and hear more about them. This happens annually, chatter increases from January peaking late February ending in April. Which leads to the question: What is this all about?
What Is an IRA?
An IRA is an individual Retirement Account (IRA) that allows a single person to save money for retirement in a tax advantaged way. The account is set up at a financial institution allowing the individual to save for retirement with tax free growth or on a tax deferral basis. Many of you might be more familiar with a 401k, this in a nutshell is a type of group employer retirement account, while an IRA is an Individual Retirement Account.
An IRA is just a type of account with tax features. Think of your IRA as a bowl — you decide what is held within your IRA. You can hold almost any investment within an IRA from your cash implements such as saving accounts and certificate of deposit (CDs) to riskier investments like mutual funds, EFTs etc. The right investment for you will depend on several factors including, time horizon, goals and your risk tolerance. Note, whatever is held within the IRA will receive the tax benefits of that particular type of IRA.
There are several types of IRAs. I would suggest meeting with or having a discussion with a financial professional to determine which is best for you depending on your needs. Savings IRAs from TwinStar Credit Union and Investment IRAs from TwinStar Financial Advisors through Cetera Investment Services are available in both Traditional and Roth. In order not to get too far into the weeds we will focus briefly on the two most popular IRAs, the Traditional and the Roth IRA.
Traditional IRA
- An upfront tax break of up to $7,000 in 2025, plus an extra $1,000 catch-up contribution if you're age 50 or older: Contributions may be deductible, thus lowering your taxable income for the contribution year. It all depends on your current income plus whether you or your spouse has a workplace retirement plan.
- Even if you have a retirement plan through your job, you may still be able to deduct some or all of your contribution depending on your income. For 2025 IRA contributions, the amount of income you can have and still get a full or partial deduction rises from 2024. Singles with modified adjusted gross income of between $79,000 - $89,000 and joint filers with income
- Investment earnings are not taxed as long as the money remains in the protection of the IRA account.
- Withdrawals in retirement are taxed at your tax rate in the year they are withdrawn. While there are no rules for when you retire, the IRS uses an age of 59 ½ at which to avoid certain tax penalties on withdrawals. The IRS also mandates that you must start taking some of your Traditional IRA by April 1 of the year after you turn age 73 (RMD – Required Minimum Distributions). You won’t be able to avoid the taxes/IRS forever.
Best for: Those who are in a higher tax bracket now than they think they’ll be in during retirement, as well as workers who do not have access to (or are not eligible to contribute to) a workplace-sponsored retirement plan.
Roth IRA
- While contributions are not deductible — meaning there’s no upfront tax break — withdrawals in retirement are completely tax-free.
- The maximum annual contribution for 2025 is $7,000 ($8,000 if age 50+). Eligibility to contribute to a Roth is based on your income.
- Income limits for Roth IRA contributions will increase in 2024 as well. The income phase-out range for Roth IRAs will be between $150,000 and $165,000 for single filers and heads of household (up from between $146,000 and $161,000). The range for married couples filing jointly goes up to $236,000 to $246,000 (from between $230,000 and $240,000). The phase-out range for married individuals filing separately remains at $0 to $10,000.
- Roth IRA withdrawal rules are more lenient, allowing tax- and penalty-free withdrawals of contributions at any time. Taxes and penalties may apply to withdrawing earnings before retirement, with a few exceptions.
Best for: Savers who anticipate being in a higher tax bracket in retirement, to take advantage of those tax-free withdrawals. A Roth is also a better choice than a traditional IRA if you might need to access some of the money before retirement age (59 ½), although we discourage dipping into retirement savings early.
Rollover/Transfers
It is hard to discuss IRAs without discussing Transfer or Rollovers – simply put these are ways to move money form an employer plan example 401K to an Individual Retirement Plan at the time of separation of employment, retirement and in rare instances during employment. It is also a way to consolidate multiple IRAs into one as well as moving an IRA from on institution to another. Outside of contributions this is another way to fund an IRA.
One final note: If you invest in both a traditional IRA and a Roth IRA, the total amount of money you can contribute to both accounts can't exceed the annual limit of $7,000 ($8,000 if 50 or older). If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.