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When you’re planning for retirement, the right account can make a big difference. Individual retirement accounts (IRAs) offer powerful tax advantages that can help your money grow faster—but only if you understand how they work.
This guide breaks down everything you need to know about IRAs, from contribution rules to investment options, so you can choose the right strategy for your future.
What is an IRA?
An IRA, or individual retirement account, is a tax-advantaged savings account designed to help individuals prepare for retirement. Set up through a financial institution, it allows you to invest in assets like stocks, bonds, mutual funds, or ETFs—similar to a regular brokerage account—but with special tax perks.
Depending on the type, those perks might include tax-deductible contributions now (traditional IRA) or tax-free withdrawals later (Roth IRA), assuming certain conditions are met. But these benefits also come with trade-offs: IRAs have annual contribution limits, early withdrawal penalties, and income-based eligibility rules.
Investing in an IRA
Most IRAs let you invest in a wide range of investment vehicles, including:
Stocks
Bonds
Mutual funds
ETFs
For set-it-and-forget-it investors, target-date funds offer built-in diversification that adjusts with your age. Low-cost index funds are another popular choice, providing broad market exposure with minimal fees.
Beyond traditional assets, self-directed IRAs also allow for alternative investments, such as real estate or private equity. However, these come with stricter IRS rules and potential tax complications, such as unrelated business income tax (UBIT).
IRA vs 401(k) Comparison
While a 401(k) allows higher annual contributions, an IRA offers broader investment options and is available to anyone with earned income, regardless of employer.
IRAs are especially useful if:
Your employer doesn’t offer a 401(k),
You’ve maxed out your 401(k) and want to save more, or
You’re changing jobs and want to roll over an old workplace plan into a Rollover IRA to maintain tax advantages.
Optimizing your retirement savings doesn’t necessarily need to be an either/or situation, though. For example, you can contribute enough to your 401(k) to earn any employer match (that’s free money), then consider funding an IRA to expand your tax-advantaged retirement savings.
Types of IRAs Explained
There are several types of IRAs, each with unique benefits depending on your income, employment status, and retirement goals:
Traditional IRA
Contributions may be tax-deductible, and investments grow tax-deferred until withdrawal. You’ll pay ordinary income tax in retirement, and required minimum distributions (RMDs) begin at age 73. Eligibility to deduct contributions may depend on your income and whether you’re covered by a workplace plan.
Roth IRA
You contribute with after-tax dollars, but qualified withdrawals are tax-free in retirement. Roth IRAs don’t require RMDs during the account holder’s lifetime, making them a strong tool for long-term tax planning. Income limits apply to contributions.
Rollover IRA
Used to transfer funds from an old 401(k) or similar workplace plan. A direct rollover (custodian to custodian) avoids taxes and penalties, while an indirect rollover requires redepositing the funds within 60 days to maintain tax advantages.
SEP and SIMPLE IRAs
Designed for small business owners and self-employed individuals:
SEP IRAs allow employer-only contributions up to 25% of compensation or $70,000 (2025).
SIMPLE IRAs support both employer and employee contributions, with mandatory employer matching—ideal for businesses with fewer than 100 employees.
Other Types of IRAs
Beyond the main categories, there are a few specialized IRAs designed for specific life stages or situations:
Custodial IRAs are opened by a parent or guardian to help a minor begin saving early.
Spousal IRAs allow a working spouse to contribute on behalf of a non-working partner.
Inherited IRAs are accounts passed on to beneficiaries, which follow required distribution rules.
Self-directed IRAs allow for alternative assets (e.g., real estate) but come with added complexity and IRS oversight.
Why Choose an IRA?
When it comes to building long-term savings, IRAs offer a winning combination of:
Tax advantages: Depending on the type of IRA, your money can grow either tax-deferred or tax-free, helping you minimize your tax burden now or in the future.
Investment flexibility: Access a wide range of assets—stocks, bonds, mutual funds, ETFs, and more—through most financial institutions.
Supplemental savings: Ideal if you don’t have a 401(k), want to contribute beyond workplace plan limits, or need to roll over old retirement accounts.
Contribution and Income Limits
IRA contribution and income limits are set by the IRS and typically adjust each year, so it’s important to check the latest thresholds before making decisions.
In 2025, the annual IRA contribution limit is $7,000 for individuals under 50, and $8,000 for those aged 50+. These limits apply across all IRAs owned, not per account.
However, your income and tax filing status may affect two things:
Whether your Traditional IRA contributions are tax-deductible
Whether you're eligible to contribute to a Roth IRA
These rules are based on phase-outs—income ranges where your ability to deduct or contribute gradually decreases as your income rises.
Traditional IRA Deduction Phase-outs (2025)
Traditional IRA deduction eligibility depends on whether you're covered by a workplace retirement plan and your modified adjusted gross income (MAGI).
If you're covered by a workplace retirement plan:
Single filers: Full deduction for MAGI up to $79,000, partial deduction between $79,000-$89,000, no deduction above $89,000
Married filing jointly: Full deduction for MAGI up to $126,000, partial deduction between $126,000-$146,000, no deduction above $146,000
Married filing separately: Partial deduction for MAGI under $10,000, no deduction at $10,000 or above
If you're not covered by a workplace retirement plan:
Single, head of household, or qualifying widow(er): Full deduction regardless of income
Married filing jointly (spouse not covered): Full deduction regardless of income
Married filing jointly (spouse is covered): Full deduction for MAGI up to $236,000, partial deduction between $236,000-$246,000, no deduction above $246,000
Roth IRA Income Phase-outs (2025)
Roth IRA contributions are limited based on your income, with the following income eligibility thresholds:
Single filers: Full contribution for MAGI under $150,000, partial contribution between $150,000-$165,000, no contribution eligibility above $165,000
Married filing jointly: Full contribution for MAGI under $236,000, partial contribution between $236,000-$246,000, no contribution eligibility above $246,000
Married filing separately: Partial contribution for MAGI under $10,000, no contribution eligibility at $10,000 or above
The partial contribution amount decreases gradually within the phase-out ranges, with specific calculations determining your exact contribution limit based on your precise MAGI within those ranges.
IRA Withdrawals, Penalties, and Exceptions
IRAs are designed for long-term retirement savings, so tapping into your funds too early can come at a cost. Here’s what to know:
Early withdrawals: Taking money out of an IRA before age 59½ generally triggers a 10% penalty, plus ordinary income taxes. However, the IRS offers exceptions for specific situations, including first-time home purchases (up to $10,000), qualified education costs, unreimbursed medical expenses, and more.
Required minimum distributions (RMDs): As mentioned earlier, starting at age 73, traditional IRA holders must begin taking annual withdrawals based on their account balance and life expectancy. Missing an RMD results in a 25% penalty, though it can be reduced to 10% if corrected quickly.
Qualified charitable distributions (QCDs): Once you reach age 70½, you can donate up to $100,000 per year directly from your IRA to a qualified charity. QCDs can count toward your RMD and exclude the donated amount from your taxable income, making them a smart tool for charitable giving in retirement.
IRA Rollover and Conversion Strategies
Rolling over a 401(k) into an IRA lets you preserve tax advantages while gaining more investment flexibility. A Roth conversion may be smart if you expect your tax rate to rise in retirement—you’ll pay taxes now, but enjoy tax-free withdrawals later.
High earners can also use the backdoor Roth strategy to bypass income limits.
How to Open and Manage an IRA
Opening an IRA is simple, but it’s important to choose a custodian that aligns with your goals. Look for institutions that offer low fees, a range of account types, strong customer support, and convenient online tools.
At Sunward, we offer two flexible IRA options:
IRA Savings Account: Start with as little as $5 and choose from traditional, Roth, or Education Savings Accounts, all with competitive dividend rates.
IRA Term Certificates: Open with $500 or more, with terms ranging from 3 to 60 months and market-leading dividend rates.
Both account types include NCUA insurance up to $250,000, secure online banking access, and tools for automatic deposits.
Once you’ve opened your IRA account, it’s smart to review your investments periodically and adjust contribution levels as your income changes.
IRA Reporting and Tax Forms
To manage your IRA effectively, you also need to stay on top of annual tax reporting. IRA activity is tracked through three IRS forms:
Form 5498 reports contributions to your IRA each year.
Form 1099-R reports distributions, rollovers, or conversions.
Form 8606 tracks nondeductible contributions to traditional IRAs.
You may also qualify for the Saver’s Credit—a tax credit of up to $1,000 ($2,000 for married couples) for low-to-moderate-income IRA contributors.
Retire Smarter: Getting Started with an IRA
An IRA serves as a flexible, tax-advantaged foundation for retirement savings. Whether you choose traditional or Roth depends on your current tax situation and retirement expectations, but starting early allows compound growth to work in your favor.
Ready to secure your financial future? Explore Sunward's competitive IRA options designed to grow your retirement savings with federally insured protection and personalized service. Visit a branch or contact us today to get started.
FAQs
Which IRA should I choose?
It ultimately depends on your current income, eligibility for deductions, and long-term tax planning goals. A traditional IRA makes sense if you want tax-deductible contributions now and expect to be in a lower tax bracket in retirement. A Roth IRA is better if you prefer tax-free withdrawals in retirement and expect to be in the same or higher tax bracket later.
How much can I contribute?
For 2025, you can contribute up to $7,000 annually ($8,000 if age 50 or older). This limit applies across all your IRAs combined, not per account. However, your ability to contribute to a Roth IRA or deduct traditional IRA contributions may be limited based on your income and filing status.
Can I have both traditional and Roth IRAs?
Yes, but your total annual contributions across all IRAs cannot exceed the annual limit ($7,000 or $8,000 for those 50+). You can split contributions between them in any combination that doesn't exceed this total.
What triggers penalties?
The most common penalty is a 10% early withdrawal fee if you take money out before age 59½. Other triggers include excess contributions, missed required minimum distributions (RMDs), or improper rollovers.
When must I take my RMD?
You must begin taking required minimum distributions from traditional IRAs starting at age 73. Your first RMD can be delayed until April 1st of the year after you turn 73, but subsequent RMDs are due by December 31st each year. Roth IRAs don't require RMDs during the account holder's lifetime.
How do rollovers work?
A rollover moves funds from a retirement plan (like a 401(k)) into an IRA. The safest option is a direct rollover, where funds transfer custodian-to-custodian, avoiding taxes or penalties. An indirect rollover gives you 60 days to deposit the funds into a new IRA or it may be treated as a withdrawal.
IRA vs 401(k): what's best for me?
A 401(k) offers higher contribution limits and possible employer matching. An IRA gives you more investment flexibility and control. In many cases, the two are best used together. If you have a 401(k), contribute enough to get the match, then consider an IRA to grow your savings further.
