IRAs: Tax-smart Retirement Savings Beyond the 401(k)

An IRA is a tax-advantaged investment account that allows you to save for retirement beyond a 401(k).

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An IRA is a tax-advantaged investment account that allows you to save for retirement in addition to, or in the absence of, an employer-sponsored 401(k).

Why save with an IRA: Retirement might be one of the largest investments you’ll make throughout your life. An IRA, or individual retirement account,* provides additional flexibility, tax advantages, and savings potential to help you build toward the golden years you deserve. Here’s how:

  • You don’t have to open an IRA through your employer, giving you more control in how you save for retirement.
  • Each type of IRA has its own specific tax advantages, but the benefit across the board is that you don’t pay taxes on earnings now (or ever, depending on which type you use) as long as the earnings remain in the IRA.
  • With an IRA, you can supplement your retirement savings beyond a 401(k), putting away more money over time, which allows you to take advantage of compound interest.

*Semi-interesting fact: The IRS actually refers to IRAs as individual retirement “arrangements.”

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Primary types of IRAs: There are a handful of account types, but most people use one of these two types.

  • A traditional IRA may allow you to deduct contributions from your taxes, and you won’t pay taxes on your withdrawals until retirement age, provided you don’t take any non-qualified withdrawals before then.
  • A Roth IRA has income limits, and you can’t deduct your contributions from your taxes. But your future withdrawals are generally tax-free—including the interest you earn and qualified distributions.

Contribution limits for traditional and Roth IRAs vary depending on your age, but are the same for both account types.

  • If you’re under 50, you can contribute up to $6,500 total per year for 2023.
  • If you’re 50 or older, you can contribute up to $7,500 each year for 2023.
  • To contribute to an IRA, you—or, if you file a joint return, your spouse—must have received taxable compensation during the year. And you can only contribute up to the amount of earned income you make.

Tax deduction limits for traditional IRAs are based on two factors: access to a 401(k) through an employer and income.

  • If you (or your spouse, if you have one) have access to a retirement plan through an employer, your deduction may be limited, depending on your income.
  • If you (and your spouse, if you’re married) aren’t covered by an employer-sponsored retirement plan, you can deduct the full amount of your IRA contributions in a given year.

The big idea: Even if you already have a 401(k), an IRA is a powerful investing tool with unique tax advantages that can help you save more than you could in your employer plan alone.

The pitch: Whether you’ve never invested a dime or already have an IRA and a 401(k), we can help you save for the future you deserve with automated technology and expert guidance.

  • Betterment’s diversified portfolios, fiduciary advice, and automated tools (ex: portfolio rebalancing, recurring deposit, glide path) help people add to their retirement savings without hassle and stress.
  • We also provide retirement planning tools to help you figure out how much you should save, depending on factors like your age, current savings, and desired retirement location.

Dive deeper to learn more about IRAs or get started investing with a Betterment IRA today.

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