IRA Accounts
IRAs are powerful retirement accounts that can help you generate wealth to ensure a comfortable future for you and your family. Starting today, if you were to invest the maximum amount of contributions allowed into an IRA each year for 25 years, you would have almost $500,000 saved! Over those 25 years, you would have contributed $175,000 but gained almost $300,000 in interest alone. That's the power of compound interest. Use the IRA calculator below to see how you can use IRAs and compound interest to set yourself up for a comfortable retirement.
What is an IRA?
The term "IRA" stands for Individual Retirement Account. It is a personal retirement account that is not affiliated with your employer. There are two types of IRAs: Roth IRAs and Traditional IRAs. Here is a brief overview of each type of account:
Roth IRA
- In 2024, the Roth IRA contribution limit is $7,000 if you are under 50 years old and $8,000 if you are older than 50. It is still a great idea to contribute even if you can only do $25 a month!
- Your Roth IRA contributions must be made with money that has already been taxed. For example, this money may be left over from your paycheck or already in a savings account.
- Money that is invested in Roth IRAs grows tax free! This means that if you invest $50 today and it grows to $400 in 30 years, you don’t owe any taxes when you withdraw the money (given you are old enough and your first contribution occurred at least 5 years earlier).
- In 2024, the Roth IRA income limits are $146,000 for single filers and $230,000 for joint filers. Since these limits are pretty high, they don’t apply for the vast majority of Americans.
Traditional IRA
- In 2024, the Traditional IRA contribution limit is $7,000 if you are under 50 years old and $8,000 if you are older than 50.
- Your contributions are made with “pre-tax” dollars. Even if you make these contributions with money from your paycheck or a savings account, you indicate how much you contributed to a Traditional IRA when you do your taxes and the IRS will essentially give you back the taxes that you previously paid on that money.
- When you are ready to take money out of your IRA, it will be taxed as ordinary income. If an initial investment of $50 grows to $400 over 30 years, that $400 will be taxed.
- There is no income limit to contribute to a Traditional IRA.
*Please keep in mind this is a basic overview of IRAs. There is a lot more to these types of accounts, like which one may be more beneficial for you and how to make withdrawals when the time comes. For now, just remember that the goal is simply to invest your money and watch it grow over time.
How to open an IRA
Let’s open an IRA and get your money working for you! Opening an account like a Roth IRA may seem like a huge effort, but the whole process can actually be completed in a matter of minutes. Here’s how to get started:
- Choose which company you want to open your account with. Common suggestions include Vanguard, Charles Schwab, and Fidelity. There is no big difference between them, just do a quick Google search and pick one that doesn’t have any fees or account minimums!
- Follow the links on your company of choosing’s website to open a Roth IRA. You may need to provide some basic information such as your Social Security number and your bank account and routing numbers to get the account up and running.
- Add money to your account. The quickest way is usually to make an online deposit using a bank account.
- Invest your money! This is the most important step that a lot of people tend to forget. Similar to 401ks, money added to your account isn’t automatically invested and growing. A widely accepted strategy when it comes to IRA investments is to “set it and forget it”. This means choosing a fund like an S&P 500 index fund which simply tracks and matches the performance of the S&P 500. By investing in an index fund, you get all of the gains (and the loses) of the companies that make up the S&P 500. Search for and buy shares in tickers like VOO, SWPPX, and FXAIX to get started. One of the best parts about investing in these funds are the low expense ratios. This means that you get to keep your money and let it compound without giving anything to a financial advisor.