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Understanding IRAs and Roth IRAs: What You Need to Know to Plan for Retirement

Financial Planning| Retirement
February 25, 2025•4 min read

A strong retirement plan isn’t built in a day. It takes thoughtful layering of savings tools, tax strategies, and future-focused decisions.

While employer-sponsored plans like 401(k)s are often the foundation, Individual Retirement Accounts (IRAs) offer additional opportunities for tax-advantaged growth and flexibility—especially for those who are self-employed, changing jobs, or simply want to save more.

If you're looking to take more control over your retirement savings, it’s essential to understand the difference between Traditional IRAs and Roth IRAs, how they work, and how they fit into your long-term financial plan.

What Is an IRA?

An IRA (Individual Retirement Account) is a type of personal savings account designed to help individuals set aside money for retirement with certain tax benefits. Unlike a 401(k), which is offered through an employer, an IRA is opened and managed independently.

There are two main types:

  • Traditional IRA

  • Roth IRA

Each offers unique tax advantages and rules about contributions, withdrawals, and income eligibility.

Traditional IRA Overview

With a Traditional IRA, your contributions may be tax-deductible, depending on your income and whether you (or your spouse) are covered by a workplace retirement plan. The money in the account grows tax-deferred, meaning you don’t pay taxes on the gains each year.

You’ll pay taxes when you withdraw the money in retirement—ideally at a time when your income (and tax bracket) may be lower.

Key Features:

  • Contributions may reduce your taxable income for the current year

  • Withdrawals are taxed as ordinary income in retirement

  • Required Minimum Distributions (RMDs) begin at age 73

  • Contributions can be made up to age 73 if you have earned income

Roth IRA Overview

A Roth IRA works in reverse: you contribute after-tax dollars, so there’s no immediate tax deduction—but withdrawals in retirement are completely tax-free, as long as certain conditions are met.

This makes Roth IRAs especially attractive for younger workers or anyone who expects to be in a higher tax bracket in retirement.

Key Features:

  • No upfront tax break; contributions are made with after-tax dollars

  • Earnings and qualified withdrawals are tax-free in retirement

  • No Required Minimum Distributions (RMDs)

  • Contributions can continue at any age with earned income

  • Income limits apply for eligibility

Contribution Limits for 2025

For both Traditional and Roth IRAs, the annual contribution limit for 2025 is:

  • $7,000 for individuals under age 50

  • $8,000 for individuals age 50 and older (including a $1,000 catch-up contribution)

These limits apply across all IRAs—not per account. So if you have both a Traditional and Roth IRA, your combined contributions cannot exceed the yearly maximum.

Eligibility and Income Considerations

Traditional IRA:

  • Anyone with earned income can contribute

  • Deductibility may be limited if you (or your spouse) have a 401(k) or similar plan at work

Roth IRA:

  • Contributions are limited by income

  • In 2025, single filers earning under $161,000 and married couples filing jointly earning under $240,000 are eligible for full or partial contributions

  • Above these limits, you may not contribute directly to a Roth IRA, but you may consider a backdoor Roth IRA strategy with the help of a tax professional

Which IRA Is Right for You?

Choose a Traditional IRA if:

  • You want a tax break now

  • You expect to be in a lower tax bracket in retirement

  • You don’t qualify for a Roth due to income limits

Choose a Roth IRA if:

  • You expect to be in a higher tax bracket in retirement

  • You want tax-free income later in life

  • You value flexibility and no RMDs

Some investors choose to contribute to both, depending on their income and tax planning strategy.

When and How to Open an IRA

You can open an IRA through:

  • Banks

  • Credit unions

  • Investment firms

  • Online brokerages

Most accounts can be set up online in under 15 minutes. You’ll be able to choose from a range of investment options including mutual funds, ETFs, stocks, and bonds.

It’s a good idea to:

  • Start with automatic monthly contributions

  • Reassess your investments annually

  • Adjust your strategy based on changes in income, tax laws, or retirement goals

How IRAs Fit Into Your Broader Financial Plan

IRAs are only one piece of the puzzle. A comprehensive retirement strategy should consider:

  • Employer-sponsored plans (like 401(k)s or 403(b)s)

  • Personal savings and investment accounts

  • Life insurance policies

  • Emergency and health savings

  • Legacy and estate planning

By combining multiple savings vehicles, you create a more stable, tax-diversified portfolio—one that can better withstand market volatility and meet your evolving needs.

Final Thoughts: Small Contributions Add Up

You don’t need to max out your IRA right away to benefit. Even small, regular contributions—especially when started early—can result in significant long-term growth.

With the right strategy in place, IRAs can help you:

  • Build financial independence

  • Lower your tax liability

  • Create flexibility in retirement

  • Ensure you're not relying solely on Social Security

No matter your age or income level, opening and funding an IRA is a practical, empowering step toward a more secure retirement.

If you're building a long-term financial plan, be sure to review your IRA options and integrate them with your overall protection strategy, including life insurance, pre-need planning, and estate preparation.

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