An IRA (Individual Retirement Account)* can be a powerful tool to help you achieve your retirement savings goals. You can think of an IRA as a savings account with tax breaks.

IRAs have become one of the most popular retirement savings options, in part because they are flexible and allow you to select your investment options. For many people, it makes sense to have an IRA in addition to saving in a 403(b) plan through your employer. You can contribute to both an 403(b) and an IRA, but you need to be aware of the amount you can contribute to both plans. 

Two types of IRAs

Traditional

This type of IRA is the oldest and most popular. Anyone younger than 70 1/2 with earned income can contribute to a traditional IRA. Your contributions are generally tax-deductible**. You do not pay taxes on the account's earnings until you begin taking out the money in retirement. You can start taking out the money as early as age 59 1/2†, but no later than age 70 1/2.*** Your IRA distributions will be taxed at ordinary income tax rates at that time. 

Traditional IRA's are generally good for people who expect to be in a lower tax bracket at retirement.

Roth

A Roth IRA is different from a traditional retirement account in that it's funded with post-tax income. In other words, you can't deduct your contributions from your taxes. But because you have already paid taxes on your contributions, your future withdrawals that follow Roth regulations are tax free.

Roth IRAs are a good option for people who want to minimize their taxable income in retirement. And unlike with traditional IRAs there are no minimum required distributions beginning at age 70 1/2, so you can leave your money in your account.  

IRA details

How much can I contribute?

You can contribute up to $5,500 to an IRA for 2018. People age 50 and over can make an additional $1,000 catch-up contribution. The deadline to contribute for 2018 is April 15, 2019.

Where can I open an IRA?

You can open an IRA through a bank, a credit union, a mutual fund company, or a brokerage house. In many cases, you can open your account online or over the phone.

What can I put into an IRA?

Generally, you can have cash, stocks and stock funds, bonds and bond mutual funds, money market funds, and certificates of deposit in your IRA.

Many people use an IRA account to consolidate old retirement plans from former employers.

What you need to think about before opening an IRA

There are a few questions you should ask before opening an IRA.

  • What is the minimum initial investment?
  • What is the minimum amount for additional contributions?
  • What are all the fees associated with opening an IRA? (Remember that there are account fees and asset management fees.)
  • What savings or investment options are available?

Notes

* Note that the IRS refers to these accounts as Individual Retirement Arrangements (see IRS Publication 590). However, they are commonly known in the industry as Individual Retirement Accounts.

** Deductibility depends on whether you or your spouse are an active participant in an employer’s retirement plan, and on your income.

*** Withdrawals prior to age 59 1/2 may be subject to a 10% IRS penalty. Required minimum distributions (RMDs) must begin after age 70 1/2. Otherwise a penalty of 50% of the amount that should have been withdrawn, but wasn’t, may be imposed.

†Withdrawals prior to age 59 1/2 may be taxable.