It used to be that people had built-in help when it came to retirement, whether it was Social Security or company pensions. But in this era of financial self-reliance, actively saving for retirement and seeking out quality advice is more important than ever.

There are so many ways to save money for retirement — and an IRA is one of them. IRA stands for Individual Retirement Account and it’s essentially a savings account with tax breaks. Let’s break it down into the important things you need to know.

What is an IRA?

An IRA is a place to put your money so you can invest it while saving for your retirement. Unlike retirement savings accounts you may have through your employer (like a 401(k) or pension), an IRA is typically something you do on your own with a bank, brokerage firm or a mutual fund company.

You can contribute to an IRA whether or not you’re employed. This is an important difference because you can contribute to your workplace plan only when you’re employed for a company who offers such a plan. You can open and contribute to an IRA account even if you don’t have a job. That’s one reason many people have an IRA in addition to their workplace retirement accounts.

Why you might want an IRA.

IRAs are a great way to protect your savings from paying a lot of taxes. Depending on which type of IRA you choose (traditional or Roth), you can pay the tax now when you first put the money in or pay later when you take it out. An IRA also lets you invest your money in a way that can provide compound growth over time.

Who is eligible and how contributions work.

If you qualify, you can make regular deposits to your IRA account. Whether or not you qualify to contribute directly into an IRA, you can always roll-over a 401(k) from a former employer — this is one of the most common ways that people fund an IRA. Some people choose this option after evaluating which account type (their 401(k) or an IRA) has lower fees, if they can no longer remain in the 401(k) as a former employee, or in an effort to consolidate their investments.

What’s the difference between a Roth, traditional, and rollover IRA?

A Roth IRA differs from traditional and rollover IRAs in a very fundamental way: money put into a Roth has already been taxed and therefore later, when you make withdrawals, you won’t be taxed. No taxes are paid on its earnings either. People who anticipate being in a higher tax bracket at retirement often choose a Roth IRA so their net tax burden is less.

A traditional IRA is sometimes used by those who expect their income to be lower in retirement than it is today. Money in a traditional IRA hasn’t been taxed, so when you withdraw at retirement you’ll pay taxes then — but most likely at a lower tax rate then you have today.
Taking care of your money and your future can be hard work, but you don’t have to go it alone — in fact our research shows investors who get help do better. Get help, learn more and start creating a financial plan today!