Whether you’re at the beginning of your career or approaching the end of it, there’s no time like the present to think about how you’ll fund a retirement that could last more than 20 years. And though each person’s financial needs will be unique to their individual circumstances and goals, consumers should consider the benefits of an individual retirement account (IRA) .
IRAs are a popular tool to supplement employer-sponsored qualified retirement plans. They provide eligible contributors with the opportunity to benefit from tax-advantaged contributions and compound interest to help grow their retirement assets over time. They also have a low barrier to entry: if you have earned income, you’re likely eligible to participate.
IRAs take earned income contributions and invest them in a variety of different financial vehicles. They offer the opportunity for flexibility, diversity and in many cases, control in investment decisions. IRAs also can be particularly valuable to consumers who don’t have access to employer-sponsored qualified retirement plans or pensions.
The question for most isn’t going to be if an IRA can make sense as part of their retirement plan, but rather what kind of IRA will provide the best benefit according to their goals?
| Traditional IRA | Roth IRA |
|---|---|
| No income limitation on who can contribute | Limited to investors with an adjusted gross income of $146,000 (single filer) or $240,000 (married filing jointly) or less in 2024 |
| Contributions that are tax deductible | Require contributions in after-tax dollars |
| Distributions that are subject to income tax | Tax-free distributions |
| Require minimum distributions beginning at age 75 (if you’re born after 1959.) | Allow for tax-free withdrawals at any age (although withdrawals before age 59 ½ are limited to only what you have contributed – no interest earnings.) |
Early withdrawals and minimum distributions
In addition to income limits between the two account types, there are key differences in how early withdrawals are handled as well as required distribution of funds. IRAs are designed to be drawn on once you reach retirement age, but as we know, sometimes life gets in the way. For a traditional IRA, withdrawing funds before the age of 59 ½ will incur a penalty of 10% of the amount withdrawn, plus taxes. There are exceptions and qualified expenses to avoid early withdrawal penalties, including certain medical, disability, higher education and home-buying expenses.
Roth IRAs allow you to withdraw whatever you have contributed tax and penalty free at any time. Withdrawing additional interest earnings is where there’s a bit of nuance. Earnings withdrawals in a Roth IRA are subject to a 10% penalty, but that penalty can be avoided if you have had the account for at least 5 years and are at least 59 ½ years of age. Roth accounts are subject to the same exceptions and qualified expenses to avoid early withdrawal penalties as traditional IRAs.
A traditional IRA will require a minimum distribution from your plan beginning at age 73 (if you are born between the years 1951 and 1959) or age 75 (if you are born after 1959.) The amount of distribution will be based on your age and the size of your account. A Roth IRA has no required minimum distribution for the account holder at any age. However, distributions may be required if the Roth IRA is passed to a beneficiary upon the account holder’s death.
Late Start: Catch-up contributions
One important feature of IRAs is the ability to make catch-up contributions as you approach retirement age. Once you reach age 50 you are eligible to contribute an additional $1,000 annually to both traditional and Roth IRAs. There are no eligibility requirements other than age, but all catch-up contributions need to be made by tax day of the following year in order to count toward the current tax year. For instance, all IRA contributions for tax year 2024 will need to be made by tax day 2025.
Which IRA is Right for me?
Weighing the benefits, it may seem that a Roth IRA is the clear choice for investors who meet the income requirements. But it’s more a matter of projecting whether you’ll get a better tax advantage with tax-deductible contributions or tax-free withdrawals that is the determining factor. Generally, a traditional IRA may be best if you anticipate being in a lower tax bracket upon retirement but a Roth IRA may be best if you anticipate being in a higher tax bracket in retirement.
Both types of accounts are advantageous and can help achieve the ultimate goal of accumulating assets for your post-work years. A financial advisor can help project what your income may look like in retirement to determine which type of account may be most appropriate for you.
Ultimately, your choice to contribute to a traditional IRA, Roth IRA, or combination will be determined by your current and projected future retirement income as well as your goals for life after work. You should seek the advice of an investment professional to tailor a plan to your particular needs. All options can be effective savings solutions and benefit from compounding interest from time in the market.
A PNC Investments Financial Advisor can evaluate which investment vehicle may help provide the most stability and growth potential. Whether you have access to an employer-sponsored qualified retirement plan or may benefit from an individual retirement account, let us help you make sure your money keeps working long after you retire.
