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IRA 101


A penny saved can be more than a penny earned for retirement with an individual retirement account (IRA). Created in 1974, a traditional IRA gives people not covered by retirement plans at work, such as a 401(k), a tax-advantaged savings plan. An IRA also works with employer-sponsored retirement plans by allowing people who leave an employer to roll over those assets into an IRA when they change jobs or retire. As of mid-2021, 37 percent of U.S. households, more than 47 million people owned an IRA.*

IRAs are not only a smart way to save money for retirement, they offer significant tax savings. Before opening an IRA, let’s quickly review the three most common IRAs available.

1. Traditional IRA: A traditional IRA lets you direct pre-tax income toward investments that can grow tax-deferred until you withdraw them during retirement. Let’s call it the “pay me later” plan. The idea is that when you retire, you’re income will be less than it is today, which could put you in a lower tax bracket, saving you money when you withdraw funds. A few things to note: There are annual contribution limits and a schedule for required minimum distributions (RMD). If you withdraw money prior to turning 59½ years old, you may be subject to a 10 percent penalty. If you have an employer-sponsored retirement plan, you can still open a Traditional IRA, but strict contribution limits exist.

2. Roth IRA: Created in 1997, the key difference between a Traditional IRA and a Roth IRA is when taxes are taken. A traditional IRA is tax-free until you draw the funds. A Roth IRA is a “pay me now” plan; the money you contribute is taxed today, but the funds are tax-free upon withdrawal during retirement. You do not face any taxes on your investment gains, and withdrawals are penalty-free. However, you have to wait to withdraw earnings until age 59½ without facing a 10 percent early withdrawal penalty. With a Roth IRA, there is no required minimum distribution. If you don’t need the money during retirement, you can leave it in your account. Plus, you can pass the money to your heirs. As with a Traditional IRA, there are limits on how much you can contribute annually.

3. The SEP-IRA: The IRS knows retirement saving is difficult for the self-employed, so the tax agency has created specialty plans for gig workers and solopreneurs. For example, if you work for yourself, you may be eligible for a SEP-IRA. This retirement plan is similar to the Traditional IRA and is aimed squarely at the self-employed and those in the gig economy.

The contribution limits for a SEP-IRA are the same as those for other IRA accounts, so check the IRS website or ask your tax adviser for more information. Opening a new SEP-IRA or adding money to an existing one can significantly reduce your tax bill now and provide retirement income later.

We offer Traditional IRA, Roth IRA, and SEP IRA to help you secure your financial future. The right one for you depends on several factors, including your age, income, and employment status. Before deciding which is best for your situation, speak with your tax advisor regarding tax consequences and do some research on Then, visit our IRA page for more information and to sign up for your IRA.

* “The Role of IRAs in US Households’ Saving for Retirement, 2020,” ICI Research, January 2021,

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