Boosting Your Retirement Plan with an IRA

It’s never too early to begin saving for retirement. However, if you’re unsure where to start, this can be a daunting task. One product to consider is an Individual Retirement Account (IRA).

An IRA is a common personal retirement savings account with specific contribution and withdrawal rules. Along with offering certain tax advantages, an IRA gives the account holder flexibility and control of their providers and investment choices with minimal restrictions. Because you don’t have to be a certain age to open an IRA, doing so as early as possible gives your contributions time to grow.

In this article we cover the different types of IRAs, contribution and withdrawal rules, and tax benefits.

Types of IRAs

There are two main types of IRAs:

1. Traditional IRAs offer income tax advantages for the account holder because contributions are made on a pre-tax basis. Income taxes on amounts contributed and the value of investment gains are deferred until a withdrawal is made. Anyone with an earned income can contribute to this option. You may also be eligible for a tax deduction for contributions to a Traditional IRA depending on your income level and whether you participate in an employer-sponsored retirement plan.
2. Roth IRAs involve making contributions with after-tax funds, but any qualified withdrawals, including the appreciated value of investments, are tax-free. To be eligible for full contribution amounts, in 2025, your modified adjusted gross income must be less than $150,000 if you are a single taxpayer, or less than $236,000 if you are married filing jointly. Roth IRAs can also be used for certain types of expenses without early withdrawal penalties (discussed below).
   

Below we outline a few key contribution and withdrawal rules, as well as income tax benefits for both types of IRAs.

Contribution rules

To make a deposit to a Traditional IRA or Roth IRA, a worker must have earned income (wages) for the year the contribution is made. A working spouse with eligible wage income may also contribute to an IRA for a non-working spouse.

For 2025, the contribution limit for both Traditional and Roth IRAs is the lesser of $7,000 or wages earned per worker per year if the worker is age 49 or younger. If the worker is age 50 or older, contributions are limited to the lesser of $8,000 or wages earned per worker per year.

Withdrawal rules

For both Traditional IRAs and Roth IRAs, account holders must generally be at least age 59 ½ to make a withdrawal. If a withdrawal is taken before reaching this age, a penalty of 10 percent applies unless the account holder meets one of a limited number of exceptions. Withdrawals are reported by the IRA custodian or trustee on tax form 1099-R for each year they are taken.

If you are a Traditional IRA account holder, you will be required to pay taxes on withdrawals of your IRA earnings and contributions that were initially deducted. You will need to begin taking required minimum distributions (RMDs) after you reach age 73 (an earlier age may apply if you were born before 1951).

Roth IRA account holders won’t have to pay any further taxes, as long as you retire at age 59½ or later and have owned the IRA for five years. Should you meet these criteria, you can withdraw contributions without tax or penalty at any time. You may also be able to take withdrawals from a Roth IRA without penalty for certain types of expenses, including the purchase of a first home, qualified higher education expenses, certain medical expenses, and certain emergency situations. Unlike with Traditional IRAs, there is no RMD requirement for Roth IRAs.

Income tax benefits

As mentioned, Traditional IRAs defer income taxes until the account holder takes withdrawals from the IRA. This means that the account investments can grow in value over the account holder’s lifetime and the account holder won’t owe any taxes until withdrawals are taken.

The tax benefits for Roth IRAs are not as immediate. While contributions are not tax-deductible, they are able to grow over time without tax. Any qualified withdrawals you take from your Roth IRA are tax-free. 

Here are other key benefits to keep in mind for both options:

• The sooner you begin contributing to an IRA, the longer the account can grow without paying income taxes. The Roth IRA is a particularly attractive option to individuals who meet the income eligibility rules.
• If your employer does not offer an employee retirement savings plan such as a 401(k), you may be eligible for an income tax deduction if you contribute to a Traditional IRA. Income limits apply; consult your tax preparer for more information regarding this deduction and if you qualify.

While IRAs offer many benefits as a common retirement savings tool, it’s important to understand how an IRA may fit into your overall retirement plan.

Speak with a banker or financial advisor to learn more about whether an IRA is right for you.

This article is for informational purposes only and is not intended as legal, tax, or investment advice. You should consult with qualified professional advisors regarding your own situation. Non-deposit investments are not FDIC insured and may lose value. All investments involve risk, including the possible loss of principal.