When considering your retirement strategy, looking into your employer-sponsored plan is typically the first step. Depending on if you work in the private or public sector, you likely have access to a 401(k), 403(b), or Thrift Spending Plan.
While many workers will enroll in a workplace retirement plan and make monthly contributions, fewer consider supplementing their 401(k) with an Individual Retirement Account (IRA). There are a few types of IRAs, but the most common are the Traditional IRA and the Roth IRA.
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Traditional IRAs utilize pre-tax contributions, meaning that earnings can grow tax-deferred until withdrawal at retirement age. Roth IRA contributions are made with post-tax income, allowing you to fulfill your tax obligation earlier so your money can mature tax-free.
Adding an IRA to your retirement portfolio can enhance your financial plan by having an additional savings plan, especially if you’ve maxed out your 401(k) or 403(b) contributions for the year.
However, the type of IRA you choose may depend on your current income, your expected income at retirement, and your anticipated retirement age.
Benefits of having an IRA in your retirement plan
401(k)s are the most universal type of employer retirement plan, but one key caveat is that there is a cap on annual contributions.
Supplementing 401(K) contributions
In 2024, the maximum amount you can contribute to a 401(k) or 403(b) is $23,000, up from $22,500 in 2023. The contribution limit for IRAs is $7,000, up from $6,500 in 2023.
While the IRS hasn’t released the 2025 contribution limits, experts predict that it will follow the same pattern as years past. Mercer expects the 401(k) contribution to reach $23,500 next year, and IRA contributions will likely follow suit, capping at $7,500.
For this reason, having an IRA can bolster your retirement savings by adding other savings accounts if you plan to reach the annual 401(k) and 403(b) contribution limit.
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Fees
There are also notable financial benefits to having an IRA. Many 401(k)s have administrative and service fees for account management. IRAs tend to have lower fees since there aren’t employer-related expenses, and they have more straightforward and flexible account options.
Many online brokers that provide IRAs—such as Schwab, Vanguard, and Fidelity — offer low-cost and free trading plan options, significantly lowering annual fees.
Flexibility
Since 401(k)s are offered through employers, the investment plans tend to be rigid, as they are intended for a broad range of workers.
IRAs allow flexibility in investments and allocations — CDs, stocks, bonds — as opposed to the standard pre-set mutual funds employer 401(k)s typically offer. This puts the individual in the driver’s seat of their retirement plan.
Roth IRAs are also one of the few retirement accounts that allow plan holders to withdraw funds without penalties or fees in case of emergency.
Which type of IRA makes sense for you
Traditional and Roth IRAs are similar in that they have the same annual contribution limit — $7,000 as of 2024 — and the withdrawal age of 59.5. The key difference between them is the tax benefits and associated fees.
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Since Traditional IRAs use pre-tax dollars, they are recommended for those who anticipate being in the same or lower tax bracket when they start making withdrawals. Roth IRA contributions are post-tax, which benefits those who expect to be in a higher tax bracket when they reach retirement age.
Traditional IRAs are eligible for tax deductions, while Roth IRAs are not. Traditional IRAs have mandatory distributions — a minimum amount of money you must withdraw — after age 73, while Roth IRAs do not.
Roth IRA contributions have already been taxed, so they are always tax-free and penalty-free, even if withdrawn before age 59.5 — as long as the account has been held for five years or more. Early withdrawals from Traditional IRAs are subject to standard income tax and a 10% penalty fee.
When enrolling in a Traditional IRA or Roth IRA, it is essential to consider your current salary, tax bracket, and whether you anticipate needing early withdrawals. Younger workers may consider enrolling in a Roth IRA, as they will likely have lower income and tax obligations than they will in the years leading up to retirement.
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