IRA basics
IRAs are a popular and powerful retirement savings tool. Learn about the different types of IRAs that can help you reach your retirement goals.
What is an IRA and what types of IRAs are there? Get answers to frequently asked questions about this tax-advantaged retirement savings tool.
What is an IRA?
An IRA, or individual retirement account, is a personal savings plan that offers a variety of tax benefits. Whether you’re already participating in an employer-sponsored retirement plan and would like to save more, or you don’t currently have access to an employer plan, an IRA may provide you with options to help save for retirement.
Eligibility
- There are no age limits for eligibility, but you or your spouse must have earned income (up to a certain limit) to contribute to an IRA.
- Depending on your income level and the type of IRA you choose, you can hold a wide range of investments and potentially take advantage of several tax benefits.
Types of IRAs
Four types of IRAs to consider are:
Traditional IRA
If you have an earned income or are a non-working spouse of a person with an earned income, you can contribute to a traditional IRA.
The contribution limit for 2024 is $7,000 for individuals up to age 49 or $8,000 if you turn age 50 or older during the year. You can contribute the maximum contribution limit if your modified adjusted gross income (MAGI) (or your spouse’s compensation) for the year is at least that amount. If your MAGI is below the contribution limit, you can only contribute up to the amount earned. Your deductible contribution can also be limited by IRS imposed income phase outs if you or your spouse are covered by a retirement plan at work.
It is also important to note that federal law requires you to withdraw a minimum amount (known as required minimum distributions) from a traditional IRA each year once you reach a certain age.1 If you take a distribution prior to age 59 ½, without meeting one of various exceptions, the amount will be subject to a 10% IRS penalty.
Deductible traditional IRA contributions may be more advantageous if you expect to be in a lower tax bracket when you retire.
Roth IRA
Unlike traditional IRAs, Roth IRAs have income limits for eligibility. Even if you meet the requirements to set up this type of IRA, you may not qualify to take full advantage of its benefits. Here are the main requirements:
- You or your spouse must have earned income.
- Your ability to contribute to a Roth IRA depends on your MAGI and income tax filing status. If you are:
- Single or head of household: In 2024, you can make a full $7,000 ($8,000 if you are 50 or older), contribution to your Roth IRA if you have a MAGI of $146,000 or less. Your Roth IRA contribution limit is reduced if your MAGI is more than $146,000 and less than $161,000, and you cannot contribute to a Roth IRA at all if your MAGI is $161,000 or more.
- Married, filing jointly or qualifying widow(er): In 2024, you can make a full contribution to your Roth IRA if your MAGI is less than $230,000. Your Roth IRA contribution limit is reduced if your MAGI is more than $230,000 and less than $240,000, and you cannot contribute to a Roth IRA at all if your MAGI is $240,000 or more.
- Married filing separately: Your Roth IRA contribution is reduced if your MAGI is less than $10,000, and you can't contribute to a Roth IRA at all if your MAGI is $10,000 or more.
You might consider a Roth IRA if you are in a lower tax bracket now and anticipate being in a higher tax bracket during retirement.
Learn more about IRA eligibility and contribution limits.
SEP vs. SIMPLE IRA
SEPs and SIMPLEs are employer-sponsored plans, so you need to either be a business owner or work for an employer who is sponsoring a plan to be able to participate.
| SEP | SIMPLE IRA | |
|---|---|---|
| What is it? | Simplified employee pension | Savings Incentive Match Plan for Employees |
| What kind of employer offers this plan? | For-profit, nonprofit or government organizations. | For-profit, nonprofit or government organizations with fewer than 100 employees. |
| Who is eligible? |
Employees who:
An employer can choose to have less restrictive eligibility requirements. |
Employees who:
An employer can choose to have less restrictive eligibility requirements. |
| 2023 contribution limits | Your employer can contribute 25% of your salary to a SEP, up to $69,000. |
You can contribute up to $16,000 if you are under age 50.
If you are age 50 or older, you can contribute $19,500. You may be able to contribute 110% of the regular and catch-up limit if your employer has 25 or fewer employees or makes certain employer contributions. |
| Considerations |
All eligible employees automatically benefit.
|
Roth contributions are permitted under SECURE Act 2.0 but because IRS regulations have not been issued yet, most providers don’t offer a Roth option. Additional employer contributions are required, as it is an employer-sponsored plan. Your employer will typically make either a 3% match or 2% non-elective contribution on your behalf. There is a 25% penalty on early withdrawals (prior to age 59 1/2) for the first 2 years of your participating in the SIMPLE IRA Plan and a 10% penalty thereafter. |
IRAs and taxes
Traditional IRA tax considerations
For traditional IRAs, your contributions may be tax deductible on your federal income tax return, which can lower your taxable income for the year.
If neither you nor your spouse are covered by a 401(k) plan or another employer-sponsored plan, you can usually deduct the full amount of your annual IRA contribution if you have earned income. However, if you or your spouse is covered by a retirement plan at work, your ability to deduct your contributions depends on your MAGI and your income tax filing status.
Roth IRA tax considerations
Roth IRA contributions are not tax deductible. Only after-tax dollars can be invested in a Roth IRA. Distributions of contributed amounts are tax-free and if you meet certain conditions, your withdrawals of earnings from a Roth IRA will be income tax free as well. Generally, you are eligible for a tax-free distribution of earnings if you meet a five-year holding requirement and:
- You reach age 59 ½ by the time of the withdrawal
- You make the withdrawal due to disability
- You make the withdrawal to pay first-time home-buying expenses (lifetime limit is $10,000)
- Your beneficiary or estate makes the withdrawal after your death
If you meet the qualifications, you also avoid the 10% early withdrawal penalty. Note that nonqualified distributions will be taxed (and potentially penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made. Ensure you aggregate your Roth IRAs on IRS Form 8606 when calculating the tax consequences of a distribution.
Another benefit of Roth IRAs is that there are no required minimum distributions at any time during your life. You can put off taking distributions until you need the income, or you can leave the balance to your beneficiary without taking a distribution. Owners of inherited Roth IRAs are required to take distributions.
Retirement planning resources
Even if retirement is far away for you, it's important to be prepared. Our retirement resource center can help answer your questions about retirement to help you feel more confident about your future.
See resourcesIRA vs. 401(k): Key differences
Unlike traditional and Roth IRAs that do not have age limits, you typically must be at least 21 years old to contribute to a 401(k) plan, with at least 1 year of service with your company. However, you can contribute more to your 401(k)—the maximum employee contribution is $23,000 for those under age 50 and $30,500 if you are age 50 or older2 for 2024.
Additionally, if your 401(k) plan permits, you may be eligible to make after-tax contributions. These contributions do not count toward the $23,000 maximum but do count against the $69,000 limit for 2024. This contribution limit also includes any employer matching or profit-sharing contributions.
Note that, similar to a traditional IRA, there is a 10% IRS penalty on early withdrawals. But 401(k) plans have an exception to the penalty if you leave your employer in the year you turn 55 or older that doesn’t exist for IRAs.
Pros and cons of IRAs and 401(k) plans
| 401(k) | IRA | |
|---|---|---|
| Pros |
Some employers may match employee contributions to a 401(k) plan.
401(k) contributions generally do not have income limits (some highly compensated employees may have their contribution amounts reduced). |
IRAs typically have more investment choices than a 401(k).
You can take a withdrawal from your IRA account at any time (taxes and penalties may apply) contributions may reduce your taxable income for the year. |
| Cons |
401(k) plan participants are limited to the plan’s available investment options.
You generally can’t take a withdrawal from a 401(k) plan unless you leave your employer (or qualify for a hardship distribution). |
Traditional and Roth IRAs do not offer matching contributions from an employer.
Traditional IRAs have income limits for deductibility (if you or your spouse have a plan at work). Roth IRAs have income limits for contributions. |
Rollover evaluator
If you have multiple retirement savings accounts held in more than one place, the rollover evaluator will help educate you to understand the pros and cons of keeping your retirement savings in an employer-sponsored plan such as a 401(k) or 403(b) versus rolling it over into an IRA.
Get startedGet started.
An Ameriprise financial advisor can help you evaluate the different types of retirement accounts and determine which may be appropriate for you depending on your personal situation and goals. Connect with an Ameriprise financial advisor today.
RELATED INFORMATION
Or, request an appointment online to speak with an advisor.
At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's.
If you know someone who could benefit from a conversation, please refer me.
Background and qualification information is available at FINRA's BrokerCheck website.
2Note: Effective in 2026, catch-up contributions for participants age 50 or older must be made on a Roth basis under 401(k), 403(b), and governmental 457(b) plans. However, the requirement applies only if the employee’s prior-year wages from the employer sponsoring the plan exceed $145,000 in the previous taxable year.