When it comes to preparing for retirement, Individual Retirement Accounts (IRAs) remain one of the most powerful tools for growing savings, alongside Social Security.
But not all savers are alike. Depending on your tax situation, investment horizon or risk appetite, the right choice can vary.
Rather than reviewing each type of IRA, let’s take a look at the most common profiles and the type of account that best suits them, from a retirement planning perspective.
Young professionals at the start of their careers
Are you at the beginning of your working life, with several decades to go before retirement? If you expect your income, and therefore your tax bracket, to rise, a Roth IRA is often a wise choice.
Contributions are after-tax, but earnings and withdrawals at retirement are fully tax-exempt.
This mechanism allows you to “pay your taxes today” at a potentially lower rate, to benefit from an after-tax income tomorrow.
Another advantage is that your contributions (but not the earnings they produce) can be withdrawn at any time, offering flexibility in case of need.
Experienced employee close to retirement
If you’re in a high tax bracket today, but anticipate a drop in income after retirement, the Traditional IRA can optimize your situation.
Contributions are tax-deductible in the year they are made, immediately reducing your taxable income.
Earnings are tax-sheltered, and you’ll only pay taxes on withdrawals when your tax rate may be lower.
It’s the classic “pay taxes later” strategy, effective for maximizing the savings available today.
Experienced investors seeking diversification
Some savers are not content with traditional Stocks, Bonds or Funds, and seek to invest in alternative assets such as Real Estate, physical Gold, shares in unlisted companies (Private Equity) or Cryptocurrencies.
If you want to access these assets within your retirement plan, the Self-Directed IRA is just right for you.
It offers the flexibility of investing in alternative asset classes, while retaining the tax advantages of an IRA.
However, beware that these accounts require rigorous management, a specialized custodian, and a thorough understanding of tax rules to avoid prohibited transactions (“self-dealing”) that can trigger taxes and penalties.
Savers with modest or irregular incomes
If your income is low or intermittent, the priority is often to maintain access to retirement savings in spite of everything. IRA rules allow you to contribute as long as you have even a modest taxable income.
In this case, the choice between Roth IRA and Traditional IRA will depend on your immediate tax situation: if you need to reduce your taxes today, opt for the Traditional, but if your rate is already low, a Roth maximizes future benefits.
For couples where only one spouse works, the “Spousal IRA” mechanism (an account opened in the name of the non-working spouse, based on the other’s income) ensures that the savings effort is not interrupted.
Self-employed or running a small business
If you’re self-employed or run a small business, you’re often looking for a compromise between flexibility and high contribution limits.
In this case, a SEP IRA or SIMPLE IRA may be of interest, but to stay with our selection, the Self-Directed IRA may also meet your needs if you want to invest in your own Real Estate or business projects (while strictly respecting the rules).
It offers rare freedom in building your portfolio, while capitalizing on tax advantages.
Key points to remember
Choosing an IRA is more than just comparing technical features, it’s a strategic tool that must be integrated into your overall retirement planning, complementing Social Security and other investments.
The Roth IRA favors those betting on higher income, the Traditional IRA benefits those who pay more in taxes today than they will in retirement, and the Self-Directed IRA appeals to savvy investors looking for diversification.
The right account is the one that follows your personal trajectory and that you know how to replenish regularly.
IRAs FAQs
An IRA (Individual Retirement Account) allows you to make tax-deferred investments to save money and provide financial security when you retire. There are different types of IRAs, the most common being a traditional one – in which contributions may be tax-deductible – and a Roth IRA, a personal savings plan where contributions are not tax deductible but earnings and withdrawals may be tax-free. When you add money to your IRA, this can be invested in a wide range of financial products, usually a portfolio based on bonds, stocks and mutual funds.
Yes. For conventional IRAs, one can get exposure to Gold by investing in Gold-focused securities, such as ETFs. In the case of a self-directed IRA (SDIRA), which offers the possibility of investing in alternative assets, Gold and precious metals are available. In such cases, the investment is based on holding physical Gold (or any other precious metals like Silver, Platinum or Palladium). When investing in a Gold IRA, you don’t keep the physical metal, but a custodian entity does.
They are different products, both designed to help individuals save for retirement. The 401(k) is sponsored by employers and is built by deducting contributions directly from the paycheck, which are usually matched by the employer. Decisions on investment are very limited. An IRA, meanwhile, is a plan that an individual opens with a financial institution and offers more investment options. Both systems are quite similar in terms of taxation as contributions are either made pre-tax or are tax-deductible. You don’t have to choose one or the other: even if you have a 401(k) plan, you may be able to put extra money aside in an IRA
The US Internal Revenue Service (IRS) doesn’t specifically give any requirements regarding minimum contributions to start and deposit in an IRA (it does, however, for conversions and withdrawals). Still, some brokers may require a minimum amount depending on the funds you would like to invest in. On the other hand, the IRS establishes a maximum amount that an individual can contribute to their IRA each year.
Investment volatility is an inherent risk to any portfolio, including an IRA. The more traditional IRAs – based on a portfolio made of stocks, bonds, or mutual funds – is subject to market fluctuations and can lead to potential losses over time. Having said that, IRAs are long-term investments (even over decades), and markets tend to rise beyond short-term corrections. Still, every investor should consider their risk tolerance and choose a portfolio that suits it. Stocks tend to be more volatile than bonds, and assets available in certain self-directed IRAs, such as precious metals or cryptocurrencies, can face extremely high volatility. Diversifying your IRA investments across asset classes, sectors and geographic regions is one way to protect it against market fluctuations that could threaten its health.
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