Individual Retirement Accounts (IRAs)

How an IRA Works

An IRA is a personal retirement savings account that offers certain tax advantages. Although self-employed workers typically use IRAs, individuals with workplace retirement accounts can also open them.

Banks, online brokerages, personal brokers, life insurance companies, and investment companies offer IRAs. Eligibility for an IRA is relatively straightforward. Earned income is a common requirement for most IRAs, and no minimum amount is typically required to open an IRA.

When you contribute money to your IRA, you can invest it in an interest-bearing account or the market. While the guidelines may vary slightly depending on the account, your IRA contributions may be partially or entirely tax-deductible, saving you money at tax time.

These investments grow tax-deferred until you withdraw them, and withdrawals are taxed as regular income.

Types of IRAs

Knowing how IRAs can differ will help you and your EP Wealth advisor determine which products may be most beneficial for you.

Traditional IRA

The most common IRA is a traditional IRA. It is a way to save for retirement using deductible pre-tax dollars and is available to anyone with earned income. Once you reach 59½, you can access these funds without restrictions or penalties.

Traditional IRAs are potentially ideal for anyone who does not have access to an employer-sponsored retirement plan. They can also be helpful if you expect to shift to a lower tax bracket once you stop working because funds are taxed when you withdraw them.

Roth IRA

With a Roth IRA, after-tax dollars are invested. Although these contributions are not tax deductible, withdrawals are tax-free. While you can take money out of your Roth IRA at any time, there are penalties and taxes for withdrawals on accounts if you are below age 59½ and for accounts that are less than five years old.

A Roth IRA can be a good option if you expect to be in a higher tax bracket when you retire.

Payroll Deduction IRA

Another IRA option is a payroll deduction IRA, where an employee opens a traditional or Roth IRA account and authorizes a payroll deduction to fund it. Any business, even self-employed individuals, can establish a payroll deduction IRA program.

It is one of the simplest IRAs to establish and maintain because the employee makes all the contributions and determines where they invest. The employer simply directs the payments to the appropriate institution. Contribution limits for payroll deduction IRAs are the same as those for other IRAs.

SEP IRA

A simplified employee pension (SEP) is a traditional IRA that an employer establishes for themselves and their employees. The employer makes contributions that cannot exceed the lesser of 25 percent of the employee’s compensation or $69,000 for 2024.

Employer contributions are deducted from the employee's taxable income, and the employer doesn’t have to pay taxes on the earnings. Employees can also contribute to SEP IRAs, and these earnings grow tax-free. Self-employed individuals and small-business owners often include SEP IRAs in their retirement plans because they are simple to open and maintain.

SIMPLE IRA

A savings incentive match plan for employees (SIMPLE) IRA is a traditional IRA for small companies with less than 100 employees and self-employed individuals. For 2024, employees can contribute up to $16,000 with a $3,500 catch-up contribution for account holders 50 and older.

Employers must match either a fixed 2 percent contribution or up to 3 percent matching contribution of the eligible employee’s compensation. Contributions are tax-deferred and tax-deductible but may be subject to penalties on withdrawals made within two years of contribution.

A SIMPLE IRA allows employers to offer employees a means to contribute to their retirement savings.

Contribution Limits

The Internal Revenue Service (IRS) determines IRA contribution limits for each year, which are sometimes increased based on cost-of-living adjustments (COLAs).

The IRA contribution limit for 2024 is $7,000 for individuals under 50. Those 50 and up can contribute an additional $1,000 for an annual total of $8,000. This total does not include transfers from other accounts, specifically rollover IRAs.

The deadline to contribute to your IRA is tax day or April 15 of the following calendar year. For example, you have until April 15, 2025, to make IRA contributions for the 2024 tax year. You can have several IRA accounts, but the combined total contributions are limited to what you earned that year.

Deduction Limits

Whether you can deduct some, all, or none of your IRA contributions depends on your tax filing status, whether you or your spouse participate in an employer-sponsored retirement plan, and your modified adjusted gross income (MAGI).

Check with your EP Wealth retirement planning professional or the IRS for specific deduction limits for your household income and retirement accounts.

RMDs (Required Minimum Distributions)

Once you reach a certain age, you must withdraw a certain amount from your retirement accounts each year. You can always take more than the required minimum distribution (RMD)—but you cannot take less. RMDs apply to virtually all retirement accounts, including IRAs.

The Secure 2.0 Act increased the RMD age to 73 for IRA owners who turn 72 after December 31, 2022. (Those who turned 72 earlier are not affected by this change.) Once you turn 73, the deadline to take your first RMD is April 1 of the following year. So, if you turn 73 in 2024, you have until April 1, 2025, to take your initial RMD.

An IRA is just one part of a larger financial strategy for retirement planning. EP Wealth's financial professionals can explore these and other savings vehicles to help you potentially make a smooth transition to retirement. Call or connect online to find an EP Wealth advisor near you.