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so that we can spend the last few decades of our lives living calmly and knowing that we can take care of ourselves. 

That’s why it’s vital to start considering retirement plans from an early age—how will you save money, what options can you choose from, and which option is the best for your future objectives and current financial situation? This is where IRAs (individual retirement accounts) come into play. In this article, we will take a look at what IRAs are, the different types, and what benefits you might gain from having one. Let’s get started.

What Are IRAs?

An individual retirement account (IRA) is a tax-deferred investment account that allows you to save money for retirement. There are four main types of IRA: traditional, Roth, SEP, and SIMPLE. However, all of them offer tax benefits that give you rewards for your savings. IRAs can be opened at banks and brokers, and either your withdrawals or your contributions may be tax-deductible or tax-free.

How Do IRAs Work?

Having an IRA allows for your savings to grow over time. The way your balance grows over time largely depends on the way you invest and how much you put in the IRA.

The way you invest should reflect your current financial situation and risk tolerance. However, anyone that doesn’t need the money in the next five-ish years should be more equity-oriented, which essentially means investing in stocks. 

In order to contribute to an IRA, either you or your spouse need to have earned income. That being said, IRAs have an annual income and contribution limits. Additionally, there are withdrawal rules. It’s likely for you to face a 10% penalty and tax bill if you try to withdraw money prior to turning 59 years of age (however, there are exceptions). 

The Different Types of IRAs

In the United States, four of the most popular types of IRAs include traditional, Roth, SEP, and SIMPLE. Let’s have a look at how they differ from one another.

Traditional IRA 

Any contributions made to a traditional IRA are often tax-deductible. For example, if you contribute $6,000 to a traditional IRA, that could reduce the taxes you pay on your income by $6,000. However, if you want to make withdrawals from traditional IRAs when you’re retired, you will face the standard taxes on ordinary income. Additionally, traditional IRAs have a contribution limit of $6,000 per year, and only people above the age of 50 can contribute up to $7,000 per year. 

If you have a spouse and if either of you has a retirement plan at work, the amount of your traditional IRA contribution that you can deduct will either get eliminated or reduced once you have a certain income. You are still allowed to make contributions. However, they won’t be tax-deductible. 

Along with that, you can take distributions from a traditional IRA after you’ve reached 59 years of age. As mentioned above, If you attempt to take out money before that, you can face penalties.

Roth IRA

If you make contributions to Roth IRAs, you should know that they aren’t tax-deductible. However, withdrawals are entirely free of taxes, and there are no taxes on investment gains. It’s an excellent option for people who are looking to invest but still have plenty of time to work before retiring. 

The main difference is between paying taxes now and paying taxes in the future. With Roth IRAs, you pay taxes immediately, but if you believe that they will go up in the coming years, then that’s a smart choice as it minimizes the amount you will have to pay. 


Typically, SEP IRAs are great for self-employed people or small business owners that don’t have that many employees. Much like traditional IRAs, the contributions here are tax-deductible, and so investments can grow tax-deferred until retirement when they get taxed as regular income.

In 2022, contributions were limited to $61,000 or 25%, depending on whichever is less. Along with that, there’s no catch contribution at age 50+, and SEP IRAs require minimum distributions to begin at age 72. SEP IRAs also need proportional distributions for each employee if business owners contribute for themselves.


SIMPLE IRAs stand for Savings Incentive Match Plan for Employees Individual Retirement Accounts. They are aimed at small businesses with around 100 or fewer employees. Like traditional IRAs, the contributions are tax-deductible here, and investments can grow tax-free until retirement when they get taxed as standard income. 

In 2022, employee contribution limits are $14,000 per year for people under the age of 50. Those who are older can make an additional contribution of $3,000, which is often called a catch-up contribution. Along with that, employer contributions are mandatory with SIMPLE IRAs. 

What Are the Benefits of an IRA? 

So far, we’ve covered what IRAs are and the different types of IRAs that we have in the United States. Now that you know that information let’s look at some of the main benefits of having an IRA. 

  • Saving money for retirement
  • Cutting your tax bill
  • Having many investments to choose from
  • Different types of IRAs that fit different personal situations

The most significant benefit of having an IRA is the fact that you get more investment options, as a 401(k) or a pension may not give you enough money for retirement. Putting in the maximum amount of contributions in an IRA can help you prepare for the worst while saving taxes and having access to your investment options. Basically, you get more choice and more flexibility about what you can do.

Along with that, the money from the IRA can be used for other things such as buying a home, college tuition, or qualifying disability.

401(k) or IRA – which one is better? 

In reality, you can get the best of both worlds. You can make your employer match on your 401(k) and additionally open an IRA to boost your retirement funds. However, if you can’t get an employer match, if you’re planning on maxing out your 401(k), or if your 401(k) has high fees or limited investment options, it might be better to put your money mostly in an IRA.

The main difference between a 401(k) and IRA is that employers offer 401(k), while opening an IRA is something that you will have to do on your own, either through a bank or a broker. Along with that, IRAs typically have more investment options, while 401(k)s allow for higher annual contributions.

If you’ve had a 401(k) for some time now, you can move that money into a rollover IRA, which gives you the benefit of having a tax-free IRA that doesn’t trigger early withdrawal penalties. In some cases, it’s possible that you get into a situation where you have two different IRAs—however that shouldn’t worry you. For example, if you already had a Roth IRA and decided to roll over an old 401(k) into a traditional IRA, you will have two different types of IRAs. Additionally, you can also inherit an IRA, even though you have one of your own. 

All of these scenarios are completely okay as you can contribute to as many IRAs as you want, but there will be a limit on the total annual amount.

How Can You Open an IRA? 

So far, so good—we’ve spoken about the benefits of having an IRA, and now it’s time to find out how you can open one. There are two popular ways to open an IRA: through brokers or the so-called “Robo-advisors.” 

  • If you opt to open an IRA through a broker, the main benefits are that you can choose the investment you make, and there are plenty of brokers who operate online so that you can open an account quickly and safely.
  • If you go to Robo-advisors, you will help manage your retirement account. It’s a service that selects low-risk and risk-appropriate investments for you and thus minimizes your efforts in managing the IRA. With that said, if you choose this option, you will have less say in what happens to your money, so if you have vast financial experience, it may be good to avoid it. 

With that said, before deciding to open an IRA, it’s good to consider your own personal financial situation and that of your entire family. Speaking to a financial advisor will also help you make a smart decision on what type of IRA to choose and how much to contribute to it.

Key Takeaways 

IRAs are a great way to save money for when you retire and, along with that, a massive investment tool that you can leverage to your advantage. Because of that, you should consider putting some of your money into one of the four different types of IRAs. Not only will it help you feel more secure about your retirement, but it will also assist you in making the most out of your current financial situation.

Suppose you feel like you lack the financial knowledge on leveraging IRAs effectively. In that case, the best thing you can do is hire a financial advisor that can help walk you through the different scenarios until you find one that satisfies your needs and hopes for the future.

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

Calendly link Work: 435.658.1934 Contact: 330.284.3211
Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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