Several people in my life have told me about various encounters they’ve had with the term “IRA” or “Roth IRA” – whether at a friend’s house, or in random small talk at work, or even during a retirement seminar that their company hosted for employees. In most cases the IRA has managed to become some nebulous retirement or investment grey cloud that has a life of it’s own and certainly doesn’t seem to be accessible to simple folks like us.

Let me see if I can help clear this up a bit.

An individual retirement account (IRA) is just that – an investment account for retirement. There are many types of retirement accounts, and the IRA is just one of them. Investing money from inside an IRA is very similar to a standard, or “retail” investment account which is used to invest your hard-earned capital into various specific investments. The only difference between a retail investment account and an IRA is that an IRA has special tax rules which are designed to help the individual save for their retirement independently from their employer. Money that gets put into an IRA is protected from taxes in one way or another.

Here are the most important rules for Traditional IRAs and Roth IRAs:

Traditional IRA	Roth IRA
Do not pay taxes when you put money in, pay income tax when you take money out	Pay taxes when you put the money in, never pay income tax or capital gains tax on that contribution again.
You may begin withdrawing money after you turn 59 ½ years old. If you withdraw before that you will be charged a 10% penalty*.	Begin withdrawing money penalty free 5 years after you put it in, or after you turn 59 ½ years old – whichever comes first*.
You are REQUIRED to begin withdrawing from this account after you turn 72.	You are never required to withdraw from this account as the original owner.
Annual contribution limit: $6,000 (untaxed)	Annual contribution limit: $6,000 (after tax)

The $6,000 annual contribution limit applies to all of your IRAs – Roth or Traditional. So if you put $2,000 into your Traditional IRA, you can only put up to $4,000 into your Roth IRA – and vise versa.

Is an IRA a good investment? That is the wrong question. An IRA is not an investment in itself. You could put money into your IRA and leave it in cash – uninvested (don’t do that). Once the money is in the IRA, you can choose from all of the same investment types as you could if it were in a retail investment account – stocks, bonds, ETFs, Mutual Funds, REITs, cryptocurrency, the list goes on.

So should you invest your retirement savings into a Traditional IRA or a Roth IRA? The answer is yes. Deciding which one is best for you is a more nuanced question and one that we will explore in future articles. For now, if you would like to discuss your personal situation please send me your question on the “Money Questions” page!

Disclaimer: This blog post is for informational purposes only and should not be treated as financial advice. Always consult your financial professional before making any decisions that will affect your finances.