Your guide to saving for retirement with IRAs

Whether you plan to volunteer, help raise grandchildren or take up pickleball, retirement is the time to chase your dreams. For most adults, building enough assets to live comfortably without a paycheck requires a comprehensive savings strategy. Individual retirement accounts, or IRAs, can play an important role.

If you don't have a 401(k)-style plan at work or have maxed out your contributions, these accounts provide an alternate way to help boost your after-tax returns.

Here's what you need to know about saving for retirement with IRAs so you can feel confident about your financial future.

We'll cover:

• What is an IRA?
• IRA account types
  
  • How traditional IRAs work
  • How Roth IRAs work
  • How SIMPLE IRAs work
  • How SEP IRAs work
• IRAs & catch-up contributions
• An IRA comparison chart at-a-glance
• Should you have both a 401(k) & IRA?
• Should you have both a traditional & Roth IRA?
• How to decide which IRA is right for you

An IRA is a retirement account that allows you to purchase a wide range of investments, including individual stocks and bonds, mutual funds, and other investments you choose depending on your goals, risk tolerance and time until you plan to retire. It may help to think of it as a folder that holds these investments for retirement. IRAs have the potential to grow and offer tax-advantages.

IRAs are offered at a variety of financial institutions, from brokerage firms and mutual fund companies to banks and insurance firms.

The most common IRAs are the traditional and Roth versions, which you fund with your own money. However, small business owners and their employees may have access to SIMPLE IRAs and SEP IRAs, which have unique features.

Traditional IRAs and Roth IRAs are both popular ways of building your assets for retirement. The main differences between the two are how and when each is taxed.

A traditional IRA is a type of qualified retirement savings plan. You make contributions that have the potential to experience compound interest over time. To qualify for a traditional IRA, you or your spouse must have earned income. There are no age requirements or income thresholds to open a traditional IRA.

A traditional IRA is typically funded with pretax dollars, and taxes are deferred until you begin withdrawals. With a traditional IRA, your contributions are tax-deductible if you and your spouse don't participate in an employer-sponsored plan. If either of you does participate in an employer plan, your contribution would be tax-deductible as long as your income is below certain income thresholds.

• 2023 contribution limit for a traditional IRA: $6,500 if you're under age 50; $7,500 if you're 50 or older.

• 2024 contribution limit for a traditional IRA: $7,000 if you're under age 50; $8,000 if you're 50 or older.

With a traditional IRA, you must begin making required minimum distributions by the time you reach your required beginning date (RBD). Your RBD depends on the year you were born:

• If you were born between 1951-1959: Your RMD start age is 73.
• If you were born in 1960 or later: Your RMD start age is 75.
  

Since you get a tax benefit upfront, you pay income tax on the money you withdraw in retirement. Qualified withdrawals can be made penalty-free as early as age 59½. But at that stage of life, you might be in a lower tax bracket than you are now, providing a potential benefit.

If you need to withdraw funds from a traditional IRA before 59½, you may face a 10% penalty unless you qualify for an exception. Exceptions include to pay health insurance premiums after a job loss, to purchase a first home, to help pay for the birth or adoption of a child, and to help pay qualified education costs for you or a family member. You can view the full list here.

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A Roth IRA works similarly to a traditional IRA, but with different tax advantages and income limits to participate.

With a Roth IRA, each dollar you contribute is one you've already paid tax on. This helps reduce further tax liabilities later on.

The contribution limit for a Roth IRA is the same as a traditional IRA.

• 2023 contribution limit for a Roth IRA: $6,500 if you're under age 50; $7,500 if you're 50 or older.

• 2024 contribution limit for a Roth IRA: $7,000 if you're under age 50; $8,000 if you're 50 or older.

Because you contribute after-tax dollars, you can withdraw the contributions you've made at any time without incurring taxes or penalties. This "back-loaded" tax benefit may be advantageous if you're at an earlier stage of your career or otherwise expect to be in a higher tax bracket in retirement than you are today.

When it comes to the earnings you've gained, you can make tax-free withdrawals on those after you reach age 59½ and have owned the account for more than five years.¹

Unlike traditional IRAs, Roth IRAs don't have a RMDs for withdrawals. If you have enough income from other sources to live on, you could continue to let this investment grow until you need it. However, if your Roth IRA is inherited by a beneficiary, they will be subject to distribution requirements.

While the Roth IRA offers the appeal of tax-free withdrawals, high earners may find they're not allowed to make direct contributions to a Roth due to IRS income limits. When your adjusted gross income tops a certain amount, you only may be eligible to contribute a reduced amount to a Roth IRA—or not be allowed to contribute at all.

If you make equal to or more than these limits, you can't contribute anything to a Roth IRA:

Income limits don't apply if you're completing a Roth IRA conversion.²

Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) individual retirement accounts (IRAs) are two of the most popular and convenient ways for a business owner to contribute to both their own and employees' retirement savings.

To offer a SIMPLE IRA, an organization generally must have fewer than 100 employees. SIMPLE IRAs may be particularly appealing if you're self-employed, whether or not you have employees. You're required to fill out a form, but you don't have annual filing requirements.

You make certain matching or non-elective contributions directly to each eligible employee's SIMPLE IRA, including your own. As an employee, you can make salary deferral contributions to a SIMPLE IRA up to $15,500 in 2023 or $16,000 in 2024.

If you employ other people, you're required to contribute each year to any SIMPLE accounts established for qualified employees by either making matching contributions up to 3% of the employee's compensation or nonelective contributions worth 2% of the employee's compensation.

You own all of the money in your SIMPLE IRA, including any employer contributions, at all times.

Contributions to a SIMPLE IRA are made on a pretax basis and are taxed at your ordinary rate when you make withdrawals after age 59½. An early withdrawal penalty of 10% applies to any ineligible distributions before then (this goes up to 25% if you take a distribution in your first 2 years).

SEP IRAs are a retirement savings vehicle available for business owners, either with or without employees. They also provide the most flexibility when it comes to contributions. Each year, you can decide how much you contribute to your employees' accounts, if anything.

The contribution limit is one of the biggest differences between SIMPLE and SEP IRAs.

• 2023: You, as the employer, can contribute can contribute up to $66,000 or 25% of compensation (based on earnings up to $330,000), whichever is less.

• 2024: You, as the employer, can contribute can contribute up to $69,000 or 25% of compensation (based on earnings up to $345,000), whichever is less.

If you're a sole proprietor, your compensation is your net earnings from self-employment as defined by the IRS.

Employers aren't required to put money in their employee's accounts each year. If you're the employer, it gives you more financial flexibility.

But if you're an employee, this feature of SEP IRAs can give you less certainty with your retirement planning. If employers do provide funds in a given year, they have to contribute equally to all employees.

When you take money out of your account after age 59½, you pay taxes on the distribution at your ordinary rate. An additional penalty of 10% applies to early withdrawals unless the distribution qualifies for an exemption.

Starting to save early in your career is the ideal approach. However, you may have experienced employment setbacks or large expenses as a young adult that set you back. Fortunately, the tax code includes catch-up provisions that boost IRA contribution limits as you get closer to retirement.

Most investors can contribute up to $6,500 in 2023 or $7,000 in 2024 into IRAs. However, catch-up contributions allow you to contribute an extra $1,000 a year once you reach age 50.

If your plan allows it, you may have the opportunity to make catch-up contributions to a SIMPLE IRA as well. The amount you can invest in these accounts is capped at $15,500 in 2023 or $16,000 in 2024. But if you're 50 or older, you can contribute an extra $3,500.

Each of the four kinds of IRAs has unique features that are important to understand before making a contribution. Here's a quick look at some of the key differences between them.

In some cases, you may benefit from using a 401(k) and an IRA in tandem. Because their maximum contribution amounts are independent of each other, investing through one doesn't limit your ability to put money in the other account.

If you have access to an employer-sponsored retirement plan at work, it's typically a good foundation for your long-term savings. This is especially true if your employer offers to match a portion of your contributions. However, you might consider investing additional dollars beyond the employer match into an IRA. IRAs may be particularly appealing if:

• You're not satisfied with the more limited investment options available through your employer plan.
• The mutual funds available through an IRA have lower fees.
• You want to take advantage of tax-free withdrawals, and your employer plan doesn't have a Roth option.
• You want the flexibility to make penalty-free withdrawals of contributions with a Roth IRA.

Choosing which retirement account to use involves carefully weighing the pros and cons. If you're not sure which is best for you, consider consulting with a financial advisor who can steer you in the right direction.

As long as you have earned income, you can invest with both types of IRAs in the same year. However, the annual contribution limit applies to your total contributions to both traditional and Roth IRAs.

You might want to split your contributions between both for a few reasons. For instance, you might not be confident about whether your tax bracket may go up or down in retirement, in which case a hybrid approach can help mitigate your risk. Even if a traditional IRA seems to offer a larger tax break, you might want some money in a Roth IRA so you have the flexibility to make tax-free withdrawals of contributions at any time.

• You expect to be in the same or a lower tax bracket in retirement.
• You don't anticipate needing to take money out of the account until retirement.
• You're unsure whether a traditional or Roth IRA may provide a larger tax benefit, so you contribute to both.

• You think you may be in a higher tax bracket in retirement.
• You want the flexibility to take out the money you've contributed before age 59½ without penalties.
• You're concerned about RMDs eroding your assets.

• You own a small business and sponsoring a 401(k) is too expensive or time-consuming.
• You're self-employed and desire higher contribution limits than a traditional IRA.
• Your business has enough cash flow to provide mandated contributions.

• Your small business has more than 100 employees and can't offer a SIMPLE IRA.
• You're self-employed and can contribute more than you would with a traditional IRA.
• Your business doesn't have the cash flow required to make mandatory contributions.

Saving part of your paycheck through an IRA can be a great way to build the assets you need for a secure retirement. Because of the many rules regarding contributions and withdrawals, choosing which IRA is best can be a complex decision. A Thrivent financial advisor can work with your tax professional or attorney to help identify the account that delivers the biggest tax benefit and recommend the right investment choices for your goals.