What Is an Individual Retirement Account (IRA)?
An individual retirement account (IRA) is more than just a savings account — it’s a flexible tool designed to help you build long-term financial security. With an IRA, you can choose your investments and decide how much to contribute each year within IRS limits. You can also benefit from unique tax advantages that can help your money grow over time. Unlike employer-sponsored retirement plans like a 401(k), an IRA is fully yours to manage, giving you greater control and flexibility in shaping your retirement path.
Whether you’re just getting started on your savings journey or planning to supplement a workplace retirement plan, understanding how IRAs work is a key step in creating a confident financial future.
In this video, Kelli Kiemle, Managing Director of Growth and Client Experience, explains:
- Tax-advantaged ways to save for the future — how IRAs use deferred or tax-free growth to help increase savings.
- The many different types of IRAs — each offering unique features depending on your goals.
- The age rules for withdrawals — including when penalties apply and when you can access your money without extra cost.
Why Consider an Individual Retirement Account?
IRAs are a common and effective way to build wealth for retirement, but their flexibility also makes them valuable for those who may never plan a “traditional” retirement. They can act as an income bridge if you scale back hours later in life, or as a way to pass wealth to the next generation. For some, an IRA is the first step toward financial independence; for others, it serves as a strategic supplement to pensions, 401(k)s, or other retirement plans.
By investing steadily and making thoughtful decisions about which type of IRA fits your needs, you can work to create a financial cushion that adapts with you over the decades.
Types of Individual Retirement Accounts
There are two main kinds of individual retirement accounts, each with its own advantages depending on your goals, income, and stage of life:
- Traditional IRA: Contributions may be tax-deductible, and your savings grow tax deferred. You’ll pay income taxes when you make withdrawals in retirement. This option can make sense if you expect to be in a lower tax bracket in the future.
- Roth IRA: You contribute after-tax dollars, but qualified withdrawals in retirement are completely tax-free. Many younger savers, or those who may expect higher taxes in the future, choose Roth IRAs for this reason.
There are two additional variations for either a Traditional or Roth IRA:
- Self-Directed IRA: A more specialized account that allows you to invest in a wider range of assets, such as real estate, private equity, or precious metals. These accounts follow the same tax rules as a Traditional or Roth IRA but are best suited for more experienced investors seeking broader diversification.
- Inherited IRA: A retirement account set up for a designated beneficiary to receive assets from an IRA owner who has died.
Each type of IRA offers unique benefits, so the right choice depends on factors like your current income, expected future tax rate, and comfort level with different types of investments.
Benefits of an Individual Retirement Account
- Broader investment flexibility: Depending on the IRA type, you can diversify beyond employer-sponsored options.
- Tax advantages: Grow your savings with either tax-deferred or tax-free compounding.
- Simplification: Roll over older retirement accounts to keep your strategy organized.
- Control and customization: Decide how aggressive or conservative your investments should be.
- Legacy planning: Certain IRAs can be structured to support beneficiaries and long-term family goals.
Rules & Eligibility for IRAs
While IRAs are powerful, they also come with rules you’ll want to know before getting started:
- Contribution limits: For 2025, the maximum is $7,000 annually ($8,000 if you’re age 50 or older). These limits apply across all IRAs combined.
- Eligibility: You generally need earned income to contribute. Roth IRAs have income limits, while Traditional IRAs do not.
- Withdrawal rules: Taking money out before age 59½ usually triggers a 10% penalty plus taxes, though certain exceptions exist (education, first-home purchase, etc.).
- Rollovers: You can move assets from other qualified accounts into an IRA without penalty if IRS guidelines are followed.
- Required Minimum Distributions (RMDs): With Traditional IRAs, withdrawals must begin at age 73. (Starting in 2033, this age shifts to 75.) Roth IRAs, however, do not require RMDs during the original owner’s lifetime. Inherited IRAs carry their own myriad of RMD rules so best to speak with your advisor or tax expert.
Frequently Asked Questions About IRAs
Q: Can anyone open an individual retirement account?
A: In most cases, yes. As long as you have earned income (like wages or self-employment income), you can open an IRA. Some contribution limits and income restrictions apply, especially for Roth IRAs.
Q: What happens if I withdraw before age 59½?
A: Early withdrawals typically face a 10% penalty plus regular taxes. There are some exceptions, such as medical expenses, higher education costs, or a first-time home purchase. Still, using an IRA early is best avoided to preserve long-term growth.
Q: How does a Roth IRA differ from a Traditional IRA?
A: With a Roth, you pay taxes on contributions now, but qualified withdrawals in retirement are completely tax-free. With a Traditional IRA, you may deduct contributions today, but you’ll pay taxes when you take money out later. The right choice depends on your current vs. expected future tax rate.
Q: Can I have both a Roth and a Traditional IRA?
A: Yes; you can hold both types, as long as your combined contributions don’t exceed the annual limit. Many people use both to diversify their tax exposure in retirement.
How to Get Started with an IRA
An IRA can be a powerful tool in your retirement planning toolkit, offering both flexibility and long-term growth potential. The right type of IRA – whether Traditional or Roth, – depends on factors like your current income, expected tax rate in retirement, and how comfortable you are with different types of investments. Beyond the basics, it’s important to think about how an IRA fits into your broader financial picture, including other savings accounts, workplace plans, and long-term goals. At Halbert Hargrove, our advisors are here to walk you through the options and help you build a strategy that grows with you.
Reach out today for a free consultation or visit our Retirement Planning page to learn more and start planning with confidence.
Disclosure:
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