Should I Open an IRA? What You Need to Know

An Individual Retirement Arrangement (IRA) serves as a personal savings vehicle designed for retirement, offering distinct tax advantages to help individuals accumulate wealth over time. These accounts provide a structured way to save for future financial independence, separate from employer-sponsored plans. Establishing an IRA can be a foundational step in a comprehensive financial strategy.

Understanding What an IRA Is

An Individual Retirement Arrangement (IRA) is a specialized investment account established to hold assets that grow with tax benefits for retirement savings. Unlike a standard brokerage account where investment gains are typically taxed annually, an IRA provides a tax-advantaged wrapper around investments. Money held within an IRA is either tax-deferred or tax-free upon withdrawal in retirement, depending on the type of IRA.

Within an IRA, you hold various investments such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs); the IRA itself is not an investment, but rather the account that contains them. This structure allows your chosen investments to potentially grow without immediate taxation. To open and manage an IRA, you will work with a financial institution, known as a custodian, such as a bank, brokerage firm, or mutual fund company.

Key Types of IRAs

Understanding the distinctions between a Traditional IRA and a Roth IRA is essential, as their tax treatments differ significantly. These differences often influence which type aligns best with an individual’s current financial situation and future tax expectations.

A Traditional IRA allows contributions on a pre-tax basis, which may be tax-deductible in the year they are made. Investments grow on a tax-deferred basis, meaning taxes on earnings are postponed until retirement. When funds are withdrawn in retirement, both original contributions (if deducted) and accumulated earnings are subject to ordinary income tax rates.

In contrast, a Roth IRA is funded with after-tax dollars, so contributions are not tax-deductible. Its advantage lies in tax-free growth and tax-free qualified withdrawals in retirement. Once you reach age 59½ and have held the account for at least five years, withdrawals of both contributions and earnings are entirely tax-free.

The choice between a Traditional and Roth IRA often depends on your current income level and anticipated tax bracket in retirement. If you expect to be in a lower tax bracket now than in retirement, a Traditional IRA with its upfront tax deduction might be more advantageous. Conversely, if you anticipate being in a higher tax bracket during retirement, a Roth IRA’s tax-free withdrawals could provide greater long-term benefits.

Contribution Rules and Eligibility

Eligibility and contribution limits for Individual Retirement Arrangements are subject to IRS guidelines. For 2025, the standard IRA contribution limit for individuals under age 50 is $7,000. This amount applies to contributions made to a Traditional IRA, a Roth IRA, or a combination of both across all IRAs owned by an individual.

Individuals aged 50 and older are permitted to make additional “catch-up” contributions. For 2025, the catch-up contribution amount is an additional $1,000, bringing the total contribution limit for those aged 50 and over to $8,000.

A requirement for contributing to an IRA is having earned income for the tax year. Earned income includes wages, salaries, tips, professional fees, and net earnings from self-employment. Income from investments, such as interest, dividends, or capital gains, does not qualify as earned income for IRA contribution purposes.

The deductibility of Traditional IRA contributions is influenced by whether an individual is covered by a workplace retirement plan and their modified adjusted gross income (MAGI). For 2025, single filers covered by a workplace plan may fully deduct contributions if their MAGI is $79,000 or less, with a partial deduction available for MAGI between $79,000 and $89,000. For married individuals filing jointly where the contributor is covered by a workplace plan, the full deduction is allowed for MAGI of $126,000 or less, with a phase-out between $126,000 and $146,000. If neither spouse is covered by a workplace plan, Traditional IRA contributions are fully deductible regardless of income.

Roth IRA contributions are subject to income limitations based on MAGI, which can reduce or eliminate an individual’s ability to contribute directly. For 2025, single filers can make a full Roth IRA contribution if their MAGI is less than $150,000, with contributions phasing out for MAGI between $150,000 and $165,000. Married couples filing jointly can make a full contribution if their MAGI is less than $236,000, with a phase-out range between $236,000 and $246,000. If MAGI exceeds these upper thresholds, direct contributions to a Roth IRA are not permitted.

Opening and Funding Your IRA

Establishing an Individual Retirement Arrangement involves selecting a suitable custodian. A custodian is a financial institution, such as a bank, brokerage firm, or mutual fund company, that holds your IRA assets. When choosing a custodian, consider the range of investment options, fee structures, and the quality of their customer service and online platforms.

Once a custodian is selected, gather personal and financial information to complete the application. This includes your Social Security Number, date of birth, contact information, and employment details. You will also need to provide information for funding the account, such as bank account and routing numbers, and designate beneficiaries who will inherit the account upon your passing.

The application process for an IRA is commonly completed online through the custodian’s website. This digital process involves filling out an online form, agreeing to terms and conditions, and electronically signing documents. After your application is submitted and approved, fund the IRA.

Initial funding can be accomplished through various methods, including electronic transfer from a linked bank account, mailing a check, or a rollover from an existing retirement account, such as a 401(k). Once funds are in the IRA, choose how to invest them from available options like stocks, bonds, mutual funds, or exchange-traded funds. Many custodians also offer recurring contributions, automating savings by transferring a set amount from your bank account to your IRA regularly.