Is an IRA Right for You?

Individual retirement accounts (IRAs) are versatile savings vehicles that can help you build wealth for retirement in return for tax breaks, either up front or in the future. There are two main types of IRAs to consider:

• Traditional IRAs can allow you to make pre-tax contributions and defer the taxes you owe until you withdraw funds after age 59½. With this type of account, withdrawals in retirement are taxed as ordinary income. And if you make any withdrawals prior to age 59½, you may be subject to a 10% U.S. federal tax penalty.
• With Roth IRAs, contributions are made with after-tax dollars, so you pay taxes up front. But your money can potentially grow tax-free, and qualified withdrawals are tax-free after age 59½ if the account has been open and funded for at least five years. Generally, you can withdraw your contributions at any time without taxes or penalties. But, if you make a non-qualified withdrawal, any appreciation or earnings you take out could be subject to a 10% U.S. federal tax penalty.

Whether either IRA is right for you, depends on your specific situation and goals. Here are five common scenarios in which an IRA could be a good option for you.

Employer-sponsored 401(k) plans are considered the backbone of retirement savings for two reasons:

1. Most employers offer some form of match on employee 401(k) contributions, which is free money that you shouldn't pass up.
2. 401(k)s have generous contribution limits that usually come out of your paycheck on a pre-tax basis. In 2026, you can contribute up to $24,500, up from $23,500 in 2025. In addition, in 2026, there are two different kinds of catch-up contributions for those 50 or older. For those 50-59 or 64 and older in 2026, you can contribute an additional $8,000 to your 401(k), up from the $7,500 limit in 2025. And if you are 60 to 63 in 2026, you can contribute an additional $11,250. And that limit is unchanged from 2025.

But what if you don't have access to a 401(k) through your employer? In that case, your next best option could be a tax-advantaged IRA. For 2025, you can contribute up to $7,000 to a traditional or Roth IRA (plus a $1,000 catch-up if you're 50 or over). In 2026, the contribution limit rises to $7,500 for those under 50, and the catch-up contribution, for those 50 or over, increases to $1,100.

If you're self-employed, you can also consider another type of IRA called a SIMPLE IRA or SEP-IRA. These plans allow small business owners to set aside much more for retirement than a regular traditional IRA will allow.

Whether you're saving in a regular traditional IRA, a Roth IRA, or other IRA, the tax advantages of these accounts can potentially put you ahead of where you'd be if you only put money in a taxable account. However, we recommend speaking with your tax advisor to see which choice better fits your personal situation.

Even if you have a 401(k), an IRA might still make sense if you want to set aside more than your 401(k) allows. In that case, a traditional or Roth IRA could help you save even more. Speak to a tax advisor before enrolling to see if you're eligible to make contributions.

With an IRA, you may also have access to a wider range of investment options, including stocks, bonds, exchange-traded funds (ETFs), mutual funds, certificates of deposit (CD), and more. By comparison, most 401(k)s generally include only a limited set of investment funds.

Contributing to a traditional IRA is one of only a few tax-smart moves you can make right up until Tax Day. As long as you open and fund your account before the IRS filing deadline, your eligible tax-deferred contributions can be subtracted from your taxable income. And that might be enough to drop you into a lower tax bracket, reducing what you owe at tax time. However, there are some rules to be aware of when it comes to determining if your contributions will be tax deductible based on your income level and if you or your spouse is covered by an employer plan.

On the other hand, if you don't need the tax break now, you might prefer to contribute to a Roth IRA to take advantage of the potential tax-free growth and federal tax-free withdrawals. Your contributions will be made with after-tax dollars, so they won't reduce your taxable income now. But your money can potentially grow tax-free, which can provide tax savings when you start making withdrawals in retirement.

In addition, if you pass your Roth IRA onto your heirs, their withdrawals will also be federal income-tax free, making them a tax-efficient way to transfer wealth from one generation to the next.

There are income limitations when it comes to contributing to a Roth IRA, so be sure you check those limits before putting money into a Roth account.

Because they're each taxed differently, traditional and Roth IRAs offer unique ways to save tax efficiently, but one account is not necessarily better than the other. Having a portion of your assets in each account type can offer flexibility for your withdrawal strategy during retirement. This is often called tax diversification.

For example, let's say you have 50% of your retirement assets in a traditional IRA (pre-tax contributions) and 50% in a Roth IRA (after-tax contributions). During retirement, you can take taxable withdrawals from the traditional IRA to pay for your living expenses and if you have a large one-time expense, such as a car purchase, you could use your Roth IRA funds to make that purchase to avoid pushing yourself into a higher tax bracket. Diversifying your retirement savings into both account types can help you manage your taxable income and how much tax you owe in retirement. Remember, speak with a tax advisor to figure out which plan could work best for you.

The decisions you make today about how you save for retirement will have a lasting impact for many years to come. That's why we recommend meeting with a financial planner and tax advisor to help determine the most tax-efficient way to save and invest for your retirement.