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Just the Basics: What’s an IRA, and Do You Need One?
An IRA is an acronym that stands for individual retirement arrangement or individual retirement account. It’s the retirement savings plan you can put money into without going through an employer.
Do you need an IRA?
Maybe. Maybe not. It depends on your situation.
Advisers generally suggest contributing to a 401(k) first if you can, especially if your employer matches your contribution. That plan stretches your money further.
But an IRA could be another smart way to save for retirement if:
- Your employer doesn’t offer a retirement savings plan, or you’re about to move to a new job that doesn’t.
- Your employer does offer a 401(k) plan, but it sucks.
- You’re leaving your job to work for yourself or stay at home.
- You’re already self-employed or don’t work, and you want to start saving for your future.
- You have a 401(k) but want to save more than the annual limit (which is $18,000 if you’re under 50).
What is the Difference Between 401(k) and IRA?
The biggest difference is only an employer can sponsor a 401(k). You can open an IRA on your own — hence “individual.”
How much you can contribute each year is also way lower for an IRA — $5,500 a year ($6,500 if you’re 50 or older).
Both accounts offer a tax break. With a traditional 401(k) or IRA, you won’t pay taxes on the money you contribute to your retirement plan. (But you will when you withdraw it.)
OK, but Who is Roth?
Roth is the guy we always wanted Rachel to end up with — no, thorry, wrong Roth.
This Roth is actually a type of IRA (or 401(k), but those are less common). The key difference is when you pay taxes.
You won’t get the tax break on your Roth IRA contributions now. You’ll get it when you withdraw. And that could be better.
See, you’ll pay taxes now on, say, $5,000. Then, because it’s an investment, that money grows over the years. It could double or triple by the time you retire.
That means you’ve earned, like, $10,000 tax-free.
While anyone can open a traditional IRA, a Roth IRA is only for people who make less than $132,000 a year ($194,000 if you’re married).
So… What’s the Best Way to Save for Retirement?
Retirement planning is totally subjective, so you have to weigh the options for yourself, or ask a financial advisor.
We hope this untangles the info enough to help you ask the right questions. If you need more info, read our post on the difference between an IRA and a 401(k).
(Roth is also a guy, btw. He’s the late Sen. William Roth, who sponsored the legislation that created the plan. Take that to trivia night.)
Your Turn: Do you contribute to a traditional or Roth IRA?
Dana Sitar (@danasitar) is a senior writer at The Penny Hoarder. She’s written for Huffington Post, Entrepreneur.com, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).