Jean Chatzky
Millions of Americans depend on individual retirement accounts, more commonly called IRAs, to help save for the future — i.e. retirement. More than 40% of U.S. households reported owning some type of IRA, according to research from the Investment Company Institute (ICI).
IRAs can help you save for retirement without the help of an employer plan. Let’s unpack some of the most popular options:
Traditional IRA
Established in 1974, Congress designed traditional IRAs to give people not covered by retirement plans or pensions at work a tax-advantaged savings plan, notes ICI. They were also designed to be a vehicle where employees who left a job could roll over funds from a 401(k) retirement plan into the IRA.
With a Traditional IRA, there are no income limits; in most cases, contributions are tax-deductible. The money you invest grows tax-deferred. Then, you’ll pay taxes on the money when you withdraw in retirement.
Tax Deduction Phase-Out
The tax deduction on your contributions begins to phase out with a modified adjusted gross income (MAGI) of $73,000 for single filers and $116,000 for joint filers*. That means if you make more than that, you may be unable to take the full tax deduction. And if you make more than $83,000 for singles and $136,000 for joint filers*, you can’t take a deduction. People in higher tax brackets sometimes choose a Traditional IRA if they think they’ll be in a lower tax bracket when they retire.
Roth IRA
This is often the first choice for many savers because even though you contribute to a Roth, you don’t receive a tax deduction, but the money grows tax-free and withdrawals are tax-free. Depending on how you’re invested, and how the market performs, your money has the potential to grow exponentially, which can represent a huge tax boon.
Roth-Eligible Contributions
To be eligible to make the maximum contribution to the Roth IRA, your modified adjusted gross income (MAGI) as a single tax filer can be no more than $138,000*, for joint filers it’s $218,000*. At that point, you can make a partial contribution until you hit an adjusted gross income of $153,000* for singles, and $228,000* for joint filers, at which point the right to contribute phases out entirely.
Spousal IRA
What if you’re married and not earning an income? If you have an income-earning spouse, and file joint tax returns, you can contribute to retirement — in your name —using what’s called a spousal IRA. Here’s the deal: The working spouse contributes on behalf of the spouse who isn’t earning income. The limits on contribution and income are the same as they are for traditional and Roth IRAs.
And, If You’re Self-Employed
For small business owners or self-employed, there are two IRAs to consider:
SIMPLE IRA
This stands for Savings Incentive Match Plan for Employees — is designed for small companies (those with 100 employees or less.) It allows employers to contribute dollar-for-dollar matches for contributions of up to 3 percent of employee pay.
SIMPLE IRA Contributions
Employees can’t contribute as much as they can to 401(k)s, but more than they can into traditional or Roth IRAs. For 2024, employee contributions cap out at $16,000, and $19,500 for employees 50 or over.
SEP-IRA
SEP-IRA has significantly higher contribution limits. They’re best for those who want to contribute for themselves and perhaps for a spouse, but not necessarily for employees.
With reporting by Casandra Andrews
*based on the 2023-2024 tax year
This article is for educational purposes only and is not to be used as investment guidance or advice. For financial and tax advice for your situation, consult a financial or tax advisor. For current tax information visit, irs.gov.
Chris O'Shea
