Individual Retirement Accounts (IRA) - not from employers
What if you don’t have a company retirement plan? It simply means that in order to become rich, you will have to be a bit more proactive.
Can one really get rich saving just $7K/year?
It may not sound like much but do not forget the power of compound interest. If at age 25, you start putting $7K a year into an IRA that earned an annual return of 10%, by the time you are 65, you will have a nest egg worth nearly $2 million. Even if you wait until you are 40 to get started, you will still wind up with a hefty sum - roughly $434K.
Obviously, the earlier you start, the easier it is to accumulate major wealth. It is never too late to begin. The time to start is now. Some money is better than no money.
TODO
Add some sample amounts and calculations based on them. e.g. For $10,000, what would be the return after 25 years?
TODO
- How an IRA Rollover Can Streamline Your Retirement Savings https://www.sofi.com/article/money-life/how-an-ira-rollover-can-streamline-your-retirement-savings/
- Individual Retirement Account (IRA): What It Is, 4 Types: https://www.investopedia.com/terms/i/ira.asp
- Best IRA Accounts for April 2025: https://www.investopedia.com/the-best-ira-brokers-8764115?hid=964e1f46eb2f4ad5eff5dddf408f5d0e9618a820&did=17012859-20250325
- How to Fund a Roth IRA After Filing Taxes https://www.investopedia.com/can-you-fund-a-roth-ira-after-filing-taxes-4770667
IRA accounts
Open an IRA account.
- IRA - Individual Retirement Account - a personal retirement plan that most anyone who earns an income can set up.
- Like a 401(k) or 403(b) plan, an IRA is not an investment itself. Rather, it is a financial holding tank into which you can make tax-deferred contributions of up to $7K/year ($7500/year if you are age 50 or older) with Pay Yourself First dollars.
- When you open an IRA, you first decide how much to put in, then how to invest it (Many people invest their IRA money in a mutual fund).
- There are two types of IRAs
- the Traditional IRA
- the Roth IRA
Income limits to check if we are eligible to contribute to Roth IRA
There are income limits on who can use a Roth IRA. If you earn less than $95K/year ($150K for married couples), you can contribute up to $4K/year. If you earn more than that, the amount you can put in is reduced. If your earnings top $110K/year ($160K for married couples), you cannot use a Roth IRA at all.
Maximum Roth IRA contribution = (for 2024 $7,000 annually, or $8,000 if you’re age 50 or older)
Whether or not you can make the maximum Roth IRA contribution depends on your tax filing status and your modified adjusted gross income (MAGI).
Your contribution can be reduced or “phased out” as your MAGI approaches the upper limits of the applicable phase-out ranges listed below.
| Filing status | 2023 income range | 2024 income range |
|---|---|---|
| Single | $138,000–$153,000 | $146,000–$161,000 |
| Married, filing jointly | $218,000–$228,000 | $230,000–$240,000 |
| Married, filing separately* | $0–$10,000 | $0–$10,000 |
If your income qualifies, the next step is to determine how much you can contribute, based on your level of income. Visit irs.gov for phase-out details on how to calculate your contribution limit: https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
If your income doesn’t qualify, if you still want to open a Roth IRA, a “backdoor” path could be your solution.
https://investor.vanguard.com/investor-resources-education/iras/roth-ira-income-limits
Traditional IRA vs Roth IRA
| Type | Traditional | Roth |
|---|---|---|
| When you pay income tax on your retirement money | You contribute pre-tax dollars | You contribute after-tax dollars |
| Contributions are deductible | Contributions are not deductible | |
| Liability for income tax | On any money you withdraw after retirement | On any money you put in before retirement |
| Yes after retirement | None after retirement | |
| RMDs | Starts at the time you reach the age of 70 1/2 | No RMDs during your lifetime |
| Income limits | No limits | There are limits |
| Max contribution limits | $7,000 annually (for 2024) | $7,000 annually (for 2024) |
How do we decide which one to go with?
Visit www.rothira.com. This is a great website that covers the comparison issues between Roth and traditional IRAs, and also offers links to many articles and other sites that address the subject in detail.
Do you want your tax breaks up front or later on?
Many experts say that it is always better to take advantage of the kind of up-front tax deductions you get with a traditional IRA. Other experts prefer the Roth IRA because, once you reach retirement age, it can provide you with tax-free income for the rest of your life. So, which is better - up front or later on? In the end, it depends on what tax bracket you will be in when you retire, and that is something you really cannot know for sure.
What will be your tax bracket after retirement? Will your tax bracket be higher now or later?
Common sense would tell you that you will probably be in a lower tax bracket, since you will not be working anymore. But who knows what the tax laws will be then?
- No one really knows how tax rates could change over the next 5, 15, or 25 years.
- If you believe your tax rate is lower now than it will be when you start taking withdrawals, a conversion may look promising because you’ll pay conversion taxes while you’re in a lower tax bracket and enjoy tax-free Roth IRA withdrawals later (when the higher tax bracket won’t matter).
- But if you believe your tax rate is higher now than it will be when you start taking withdrawals, a conversion could cost you more in taxes now than you’d save with tax-free withdrawals later.
So what do you do? It may help to “diversify” your taxes - in other words, pay some of the taxes now (when you’re still building your retirement savings) and save some for later (when you need that money to cover expenses in retirement).
Still, without knowing your personal situation, it is hard to say exactly which plan may make the most sense for you. However, according to most computer projections, if you are at least 15 years away from when you plan to begin withdrawing money from your retirement account, you would probably do better with a Roth IRA. If you think you can buckle down and save enough to fully fund a Roth IRA - and you are more than 15 years away from retirement - then the Roth IRA is a great choice because, when you retire, all the money you take out of this account will be tax free.
If you cannot get a tax deduction on the traditional IRA because you are covered by an employer plan, don’t even consider doing a traditional IRA. Just go with the Roth IRA.
Why You and Your IRA May Want to Go Back in Time
There’s an old adage about saving and investing:
The best time to start was yesterday. The second best is today.
Well, when it comes to your traditional IRA, you can do both.
Invest for the Long-Term While Simultaneously Lowering Your Taxable Income. Opening and contributing to a traditional IRA account is a great way to invest for long-term growth while lowering the amount you owe in taxes at the same time.
How? Unlike employer-provided retirement accounts like 401(k)s, IRAs are individual retirement arrangements, so in a sense, the timing is between you and the IRS. Since you don’t file your taxes until April of the next year, (e.g. 2024 taxes until 2025), you actually get until the filing deadline — April 15 — to make 2024 contributions.
But why would you want to mark any of your contributions down for 2024 versus 2025?
- https://www.sofi.com/article/money-life/not-too-late-for-2024-ira-contributions/
- How to Choose an IRA Provider https://www.experian.com/blogs/ask-experian/how-to-choose-an-ira-provider/
Make your IRA automatic
Where to go to open an IRA account?
https://www.nerdwallet.com/best/investing/ira-accounts
There are 100s of banks, brokerage firms, and mutual fund companies you can choose from to help you open a Roth or traditional IRA account.
- tdwaterhouse.com
- ingdirect.com
- sharebuilder.com
- fidelity.com
- ameritrade.com
- vanguard.com