Opening an IRA savings account is one of the best financial decisions you can make for your retirement. It combines the low risk and safety of a savings account with the tax-free benefits of an individual retirement account. However, there are different types of IRA savings accounts you can opt for based on your needs and goals, with different tax conditions and contribution limits.
To help you make your choice, we’ll look into the different types of IRA savings accounts, the way they work, and the details you need to know when setting up one.
What Is an IRA Savings Account?
An individual retirement account (IRA) is a savings account that helps you set aside money for retirement by making tax-deductible contributions. These are limited by the Internal Revenue Service (IRS), depending on your income, age, and the type of IRA selected.
IRA contributions can be invested into bonds, certificates of deposit (CDs), exchange-traded funds (ETFs), mutual funds, or stocks. Unlike 401(k)s, you open, fund, and manage IRA savings accounts on your own, so you can select your investment.
Who Is an IRA Savings Account For?
You need an earned income to open an IRA savings account. This means Social Security benefits, interest-related income, or child support can’t be put toward an IRA.
Given the features of an IRA savings account, it’s best suited for:
- People beginning their retirement-saving journey
- Individuals who expect to be in a higher tax bracket during retirement
- Self-employed business owners who don’t have access to a workplace-sponsored retirement plan
- Employees who have maxed out their 401(k) or other employer-sponsored retirement plans
How Does an IRA Savings Account Work?
When you set up an IRA savings account, you can deposit funds in various investment options, such as bonds, CDs, stocks, or mutual funds. You also have full control and the flexibility to choose between high- and low-risk investment options based on your risk appetite.
Still, you should make sure to have a strategy when allocating your assets. Since asset allocation can determine as much as 90% of portfolio returns, consult an advisor before investing.
The good news is that if some of your investments don’t go well, you can move in and out of them over time without running into capital gains taxes. However, you can’t take the money out of the account until you’re 59.5. Any withdrawals before this age will be taxed and subject to a 10% penalty unless you’re using the money to cover a qualified exception, such as paying for certain medical expenses or financing a degree.
Types of IRA Savings Accounts
When opening an IRA savings account, you can choose between the following four types:
- Traditional IRA
- Roth IRA
- Simplified Employee Pension (SEP) IRA
- Savings Incentive Match Plan for Employees (SIMPLE) IRA
Traditional IRA
Traditional IRAs are tax-deferred retirement accounts in which you make contributions using your pretax income. This means you’ll have to pay taxes when you take out your money at retirement age.
For 2024, the maximum annual contribution you can make if you’re below 50 is $7,000, and $8,000 if you’re above that. While these contributions can be tax-deductible, this depends on three factors:
- Whether you have a 401(k)/403(b) at work—If you’re single, have a 401(k) at work, and a modified adjusted gross income (MAGI) below $77,000, your contributions will be fully deductible
- Whether you’re married or single—If you’re married, file as a couple, and have a MAGI below $123,000, your traditional IRA contributions will be fully deductible
- Whether your MAGI meets a certain threshold—Your traditional IRA contributions become partially deductible or non-deductible if you go above your MAGI threshold, which depends on your filing status and income
Here’s a chart you can look at to find your deduction limits:
| Filing Status | 2024 MAGI | Deduction Limit |
| Single | Below $77,000 | Full deduction |
| $77,000–$87,000 | Partially deductible | |
| >$87,000 | Non-deductible | |
| Joint filing (married) | Below $123,000 | Full deduction |
| $123,000–$143,000 | Partially deductible | |
| >$143,000 | Non-deductible |
Once you contribute to a traditional IRA savings account, your money will keep growing tax-deferred until it’s time to take it out. You also have to begin taking required minimum distributions (RMDs) by age 73 to avoid paying 10%–25% of the amount you didn’t withdraw as a penalty.
Roth IRA
Roth IRAs are non-tax-deductible retirement accounts that let you make contributions using your after-tax income and get tax-free distributions. This means you don’t have to pay taxes on your investment gains when you take the money out at retirement age.
Unlike traditional IRAs, Roth IRAs don’t have RMDs, so you don’t have to take the money out when you turn 73—you can keep contributing to the account as long as you’re earning income. In 2024, your yearly contribution can be $7,000 if you’re below 50 and $8,000 if you’re over 50.
Still, your annual contribution is limited to your income and tax filing status. Here’s a chart you can look at to understand your contribution limit:
| Filing Status | 2024 MAGI | Contribution Limit |
| Single | Less than $146,000 | Full contribution ($7,000 for <50 and $8,000 for 50+) |
| $146,000–$161,000 | Reduced contribution | |
| >$161,000 | No contribution | |
| Joint filing (married) | Less than $230,000 | Full contribution ($7,000 for <50 and $8,000 for 50+) |
| >$230,000–$240,000 | Reduced contribution | |
| >$240,000 | No contribution |
Simplified Employee Pension (SEP) IRA
A Simplified Employee Pension (SEP) IRA is a tax-deductible account in which you make contributions using your pretax income. In 2024, your SEP IRA contributions can’t exceed the lesser of:
- 25% of your compensation, or
- $69,000
This account can be set up by freelancers, independent contractors, and small-business owners for themselves or their employees. If you’re setting up a SEP IRA for your employees, you’ll have to contribute on their behalf because the IRS won’t allow them to contribute to their accounts.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax-deductible retirement account in which you make contributions using pretax income.
This account is often created by self-employed individuals or small business owners for themselves or their staff. When an employer sets up a SIMPLE IRA on behalf of an employee, both the employee and the employer can make contributions, which often qualify for tax deductions.
In 2024, employees under 50 can contribute a maximum of $16,000 per year in a SIMPLE IRA, while those above 50 can contribute up to $19,500.
Why Consider an IRA Savings Account?
An IRA can help you save for retirement and reduce income tax every year. Here are three more pros of opening this savings account:
- Tax-free growth—If you invest in a Roth IRA, you won’t have to pay any taxes or penalties when you take out the money. As you don’t have to take out the money before a certain age, you’ll also have more time to accumulate wealth
- No minimum contributions—There’s no set amount of money you have to put into your IRA every year. You can put in as much or as little as you want (as long as you don’t cross the maximum IRS limit)
- No impact on credit score—An IRA is an investment. You aren’t opening a credit line or asking a bank to lend you money—you’re giving your money to a bank. This means if you miss an IRA payment or put in less than you decided to, it won’t harm your credit score. On the downside, if you make timely IRA payments, you won’t improve your credit score either
With that being said, there’s a major risk to consider when investing in an IRA savings account—fraud. This is especially true for older investors since scammers are increasingly going after Americans over the age of 60 because this population is viewed as having the most savings. For example, a 76-year-old lawyer lost retirement savings worth $740,000 to fraud.
While IRAs are great for long-term savings, they don’t offer adequate protection against scams. This is why it might be a better idea to store and grow your savings in a high-security banking platform like FortKnox by Austin Capital Bank.
