The Simple Guide to IRAs

It’s the new year and the talk of the online investing world is naturally focused on IRAs. I’m glad to see lots of enthusiasm around individual retirement accounts and I’m also glad to help those who are unaware of this type of account and how take advantage of the benefits of IRAs. I’m here to make sure you understand the basics and get you started with this powerful wealth creation tool.

An IRA is a trust that is a personal retirement account with tax benefits. You contribute to an IRA from your earned income. Once the funds are contributed, you can purchase stocks, bonds, ETFs, and mutual funds.

Note: this article will focus on standard brokerage IRAs and not self-directed IRAs for that involve more complexity.

Traditional - you get your tax breaks now. What you invest in a traditional IRA is tax-deductible in the tax year the contributions are made. You will be taxed on your investments and the gains (capital gains and dividends) when you withdraw the funds later.

Roth - you get the tax break later. You contribute earned income after its been taxed. The investments grow and withdrawals are tax-free (if certain rules are followed, details below).

The contribution limits for IRAs are $7,500 for 2026. If you’re 50 and older, you can contribute an additional $1,100 for “catch-up” contributions for a total of $8,600. These limits increase every few years to adjust for inflation. 2026 rates are new but can change for any tax year in the future.

Are there income limits?

For the Roth IRAs, yes. Once your income reaches a certain threshold, you’re not eligible to invest in a Roth. For single filers, you reach the contribution phase-out zone once you reach a modified adjusted gross income of $153,000, $242,000 for married couples filing jointly. See the full phase out limits below.

This part of understanding IRAs can be confusing. You could use this calculator to determine how much and which type of IRA you’re eligible to use: IRA Contribution Calculator

There are no limits to the amount of IRAs you can have, however the contribution limits are enforced for all IRAs in the aggregate. Meaning if I contribute $5,000 to my Roth IRA, I am only eligible to contribute $2,500 in any other IRA, or a combination of other IRAs.

If you have a 401(k) with your employer, you can still have a traditional or Roth IRA. Contributions to a 401(k) also have no impact on what you can contribute to an IRA. Take advantage of both tax advantaged accounts.

If a spouse doesn’t work or has low income, you can use a spousal IRA. This is when the working spouse uses their earned income to fund an IRA in the non-working spouse’s name. This allows couples to invest up to $15k ($7.5k per IRA) in tax advantage accounts. The only stipulation is they must file a joint return.

You can start contributing to your IRA for the current year beginning on January 1st and you have until the tax deadline to contribute to complete that fiscal year's contributions.

Example: you can start making your 2026 contributions as of January 1st, 2026 and continue until April 15th, 2027.

If you’re making an IRA contribution from January 1st to April 15th and you haven’t mased out the prior year’s contribution limit, you have the choice to designate your contributions to the prior year.

So you have until 4/15/2026 to complete your 2025 IRA contributions. This allows you to maximize your tax liability with complete income information from the prior year.

This question is hard to answer without knowing your personal details and financial status. But a good rule of thumb is to prioritize investing in your 401k to take advantage of the full employer match. Think of the employer match as a gain on your investment. If your employer has a 100% match up to 4%, a $100k earner contributes $4k but has another $4k contributed by their employer. You can’t beat a 100% gain on your investment. After you’ve reached the max for the employer match, then consider investing in your IRA, never before!

The short answer is yes, but much consideration is needed.

Traditional IRA

There is a 10% tax penalty for withdrawals before age 59 1/2. Remember, a traditional IRA consist of contributions that were never taxed so this penalty is on top of any ordinary taxes. The withdrawal would be income added to all other income you earned that year to figure your tax rate. Once you reach 59 1/2, you’re able to withdraw the funds and just pay your ordinary tax rate, penalty free.

Once you reach age 73, you must take money from your IRA. These are called Required Minimum Distributions (RMDs). Use this calculator to figure out what your RMD would be at age 73: Required Minimum Distribution Calculator

Roth IRA

Since the money contributed to a ROTH is already taxed, you have more flexibility here. The amounts you contribute can be pulled from the ROTH at anytime, tax and penalty-free. However, the earnings from your Roth are considered qualified distributions and are subject to both the 10% penalty and ordinary taxes if they are withdrawn before age 59 1/2 and if the account hasn’t been open for five years.

There are no RMDs for the original owner of a Roth IRA. The funds can stay in the IRA for life. When the original owner dies, the beneficiary has 10 years to withdraw all the funds sitting in the IRA.

A Roth conversion is when funds are converted from a traditional retirement account such as a traditional IRA or 401k to a Roth retirement account. You can convert to a Roth IRA or Roth 401k. At the time of conversion, you’ll be taxed on the amount converted. The conversion amount is added to your gross income for that year and taxed at your ordinary income tax rate.

Why should I do a Roth conversion and pay all those taxes?

A conversion makes sense when you anticipate you’ll be in a higher tax bracket later in life when you choose to withdraw the IRA funds. Many people would like to use dividends to fund retirement. A Roth allows you to earn those dividends with no tax obligation, ever. The more dividend income you have, the less you’ll need to withdraw from your principle balance of your retirement.

This answer is a lot easier than you think. Since this is an retirement account, a diversified, moderate to low risk approach is best. These are not funds that you should expose to high risk, since you’re likely to depend on it during retirement. With that established, index funds such as a total market or S&P500 fund is all you really need in your IRA (total market fund: $VTI, S&P500 fund: $SPY).

Since a Roth IRA doesn’t tax the dividends or any other gain on your investment, I think this account is where you can take advantage of higher dividend yield or dividend growth stocks or REITS such as Realty Income Corporation ($O) or AGNC Investment Corp. ($AGNC).

Note: These are not stock recommendations, just my opinion of the types of securities I believe are better suited for an IRA.

You can open a traditional or Roth IRA on any brokerage such as Schwab, Fidelity, or Vanguard. (I recommend Schwab for ease of use and customer service, with Fidelity being a close 2nd.) It’s just as simple as opening any other online account and you can get start building wealth for your retirement right away.

IRAs, stacked with a 401k, can be accelerators to your wealth. Investing is great, but prioritizing the right investment accounts will save you a ton of money on taxes. Your investing priority should be as follows:

My goal is to bring clarity and light so we can make better investing and financial choices. We aren’t financially literate until we can effectively navigate through various financial scenarios. Let’s build wealth and secure the financial future of our families, together.