IRA
Individual Retirement Arrangement
Summary
The IRA (Traditional IRA) is a great starting point for many individuals looking to start a retirement savings pool. This is because it’s easy for individuals to establish, and it can defer taxes on both wage income and investment gains. The IRA also has a lot of flexibility, which we’ll discuss near the bottom of this summary.
Contributing money to an IRA will reduce your tax bill or increase your tax refund amount for the year in which you contribute. This, for obvious reasons, is a big advantage to individuals. Especially individuals who are tax sensitive.
Another tax benefit of the IRA is tax-deferred investment growth. The gains that you make on your investments within the account are shielded from taxes until the day you take them out. So, you can compound your returns more efficiently and you won’t have to worry about triggering any taxable events when trading in an out of your investments. So, you may want to consider an IRA for your more actively managed investment strategies.
One minor drawback to the IRA is its limited annual contribution limit ($6,500 per individual with a $1,000 additional catch-up contribution for individuals above age 50 in 2025).
Another disadvantage of the IRA is that it’s less flexible on how and when you can withdraw the funds. There are many rules, and also loopholes, for withdrawing funds with or without penalty. And rules periodically change. It may be wise to consult a financial advisor.
The basics of withdrawal rules are that you have to wait until age 59.5 before you can withdraw your funds without an IRS penalty, though you still pay tax on withdrawn funds.
A more complex method to bypass tax penalties on withdrawals that you take before age 59.5 is doing a SoSEPP. SoSEPPs are too in-depth to cover in this post. Just know that they are an option if you’re looking to access IRA funds without penalty before age 59.5. If you’re considering early retirement, this might be a viable strategy for you.
Another option with IRA funds is to do a Roth IRA conversion. These conversion strategies result in higher taxes paid today, but they result in tax-free retirement funds down the road. It may be best to consult an advisor when looking to do a conversion strategy.
Overall, a traditional IRA offers considerable tax benefits, has relatively good contribution limits depending on your income level, and has a lot of flexibility towards establishing a desired retirement goal.
If you want to unlock the true potential of an IRA, we suggest that you seek out the advice of a financial advisor and perform due diligence on their fee structure and industry history. Otherwise, there are many resources online that you can lean on with some confidence. Check out the IRS Tax Code link above.
Best for low-income, middle-income, and high-income earners, and tax-sensitive individuals. Good for individuals prioritizing a long investment time horizon and retirement savings. Good for actively managed accounts.
Ease of Setup
HSAs are easy to establish online in under 1 hour. However, not all individuals are eligible to set up an account. You must be covered by a high-deductible health plan and meet other requirements. Reference the IRS tax code above.
Contribution Limits
For 2024, if you have self-only HDHP coverage, you can contribute up to $4,150 annually. If you have family HDHP coverage, you can contribute up to $8,300 annually. This is a lower contribution limit when compared to retirement accounts, but it is a sizeable amount for low and middle-income households.
Tax Advantages
Tax-deferred contributions lower your annual tax liability, your investments grow tax-free, and making withdrawals on qualified medical expenses is tax-free. This is often referred to as a triple tax advantage account.
Withdrawal Access
You can withdraw from your HSA anytime without penalty, so long as the proceeds are spent on qualified medical expenses. HSAs even have a debit card that you can use to swipe for purchases. Withdrawals made for non-qualified medical expenses are subject to taxes and penalties. Reference the IRS tax code above.