Understanding IRAs – A Guide to Choosing the Right Retirement Strategy for You

Which IRA is right for your retirement? With several options offering unique benefits and tax advantages, choosing the right individual retirement account (IRA) is one of the most important decisions you’ll make for your financial future. Understanding these options is essential to building a retirement strategy that aligns with your goals.

IRAs are designed to help individuals save for retirement outside of employer-sponsored plans. The four primary types of IRAs are traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs. Except for Roth IRAs, these accounts offer tax-deferred growth, meaning you’ll pay taxes on withdrawals in retirement. The specific features and benefits of each type often dictate which IRA might best suit your needs, considering factors like tax implications, income levels, and employment status.

Traditional IRAs are funded with pre-tax dollars, which can be tax deductible depending on your income and whether you have access to other retirement plans like a 401(k). Contributions grow tax-deferred, allowing untaxed gains on investments until funds are withdrawn. However, contributions are only fully deductible within certain income limits. For instance, in 2024, married couples filing jointly with a modified adjusted gross income (MAGI) between $123,000 and $143,000 may see a reduced deduction.

One of the key features of a traditional IRA is the required minimum distribution (RMD), which begins at age 73 for those born after 1950. These mandatory withdrawals are taxed as ordinary income, and failure to meet the RMD requirement can result in a hefty penalty. This makes traditional IRAs particularly suitable for those who anticipate being in a lower tax bracket in retirement.

Roth IRAs offer a different approach: contributions are made with post-tax dollars, and withdrawals in retirement are tax-free. This makes Roth IRAs attractive to individuals who expect to be in a higher tax bracket in the future. The lack of RMDs during the account holder’s lifetime also adds flexibility, allowing for a more strategic approach to retirement withdrawals.

However, eligibility to contribute to a Roth IRA is limited by income. For 2024, individuals with a MAGI under $146,000 (single) or $230,000 (married filing jointly) can contribute the full amount.

In 2025, the income phase-out limits for Roth IRA contributions will increase. Individuals filing single can contribute the full amount if their MAGI is under $150,000. For married couples filing jointly, the full contribution will be allowed with a MAGI under $236,000.

Remember, Roth IRAs provide flexibility in withdrawals since contributions (not earnings) can be accessed without penalties, making them a good fit for those seeking long-term tax benefits and flexibility.

For small business owners and the self-employed, SIMPLE and SEP IRAs remain viable retirement plan options. SEP IRAs allow contributions of up to 25% of compensation or $69,000 in 2024, whichever is less. For 2025, the limit is expected to increase to $70,000. These accounts provide tax-deferred growth, and all contributions are made by the employer, which can offer significant tax advantages for business owners​

SIMPLE IRAs are designed for businesses with fewer than 100 employees. Employers are required to either match employee contributions up to 3% of salary or contribute 2% of compensation. The employee contribution limit for 2024 is $16,000, with a catch-up contribution of $3,500 for those aged 50 and older. In 2025, the employee contribution limit is expected to rise to $16,500.

Understanding the details of your retirement options is essential for making informed decisions about your financial future. Regular contributions, maximizing employer matches, and focusing on the income potential of your plan are key elements of successful retirement planning. Retirement plans are not one-size-fits-all, and the nuances of each type of IRA can significantly impact your long-term financial health.

Conclusion

Choosing the right retirement plan involves more than just picking an account—it’s about aligning your choice with your financial situation and long-term goals. The flexibility, tax implications, and contribution limits of different IRAs can play a significant role in shaping your retirement strategy.

If you’re uncertain about which retirement strategy is right for you, Liberty Group can help guide you through these decisions. Explore our resources or contact us for personalized advice on maximizing your retirement savings. Be sure to watch our previous video on pensions and 401(k)s to get a complete view of retirement plans.