Individual retirement arrangements (IRAs) are a popular way to save for retirement, and with good reason\u2014they come with numerous benefits for investors building long-term wealth. They also come with a few drawbacks you should be aware of. In this post, we\u2019ll break down what you need to know, focusing on two popular account types: traditional IRAs and Roth IRAs. <\/p>\n\n\n\n
Perhaps IRAs\u2019 best known benefit is their tax-advantaged status\u2014this benefit is designed to\u00a0 encourage you to put money away for later. The tax advantages of traditional IRAs and Roth IRAs are slightly different.<\/strong>\u00a0<\/p>\n\n\n\n Traditional IRAs let you take a tax deduction in the year you contribute as long as you (and your spouse, if you have one) don\u2019t have a retirement plan like a 401(k) plan at work. If you do have a 401(k) plan at work, you can still deduct at least some of your contribution as long as you earn under $89,000 as a single filer or $146,000 as a married couple filing jointly for 2025 (for 2026, those numbers rise to $91,000 and $149,000 respectively). Even if you can\u2019t deduct any part of your contributions, you can still contribute. Qualified distributions of pre-tax traditional IRA funds in retirement are taxed like regular income. <\/p>\n\n\n\n With Roth IRAs, you don\u2019t get a tax break in the year you contribute, but any growth and distributions in retirement that meet the IRS\u2019s rules (also called \u201cqualified distributions\u2019) will be tax-free. However, not everyone is eligible to contribute directly to a Roth IRA. In 2025<\/a>, you can\u2019t contribute to a Roth IRA directly if you earn $165,000 or more as a single filer or $246,000 or more as a married couple filing jointly (those numbers rise to $168,000 and $252,000 respectively in 2026<\/a>). There\u2019s a way around this. You can complete what\u2019s known as a \u201cbackdoor Roth,\u201d where you make a non-deductible contribution to a traditional IRA for the purpose of converting it to a Roth IRA. Wealthfront automates this process so it takes just a few clicks. Once you\u2019ve completed the conversion, you get the same tax benefits you\u2019d get if you contributed to a Roth IRA directly. <\/p>\n\n\n\n If you have a 401(k), you\u2019ve probably already noticed that it doesn\u2019t give you many choices when it comes to how your money gets invested. Fortunately, this isn\u2019t the case for IRAs. Usually IRAs, much like taxable investment accounts, come with many investment options. At Wealthfront, you can invest in a globally diversified portfolio that\u2019s personalized to your risk tolerance and customize it with hundreds of investments<\/a>.<\/p>\n\n\n\n Roth IRAs in particular come with a surprising amount of flexibility. If you make direct contributions to a Roth IRA, you can typically withdraw these contributions early, which means before age 59 \u00bd, without paying additional taxes or a penalty (which isn\u2019t the case for a 401(k) or traditional IRA). However, you\u2019ll still owe income tax and a 10% penalty on earnings (or money you earn on your contributions) you take out of your Roth IRA before retirement with a few exceptions<\/a>. For example, one popular exception allows you to withdraw up to $10,000 in earnings for a first-time home purchase. <\/p>\n\n\n\n If you have a traditional IRA, you might be able to execute a Roth conversion and benefit from the flexibility that comes with a Roth IRA. If you decide to do this, Wealthfront offers easy Roth conversions<\/a> <\/strong>that eliminate the paperwork and hassle. Just keep in mind that you need to wait at least five years<\/a> after the Roth conversion to be able to withdraw contributions without paying a penalty.<\/p>\n\n\n\n One drawback of using IRAs to save for retirement is that the annual contribution limits are relatively low. In 2025, you can contribute up to $23,500 to a 401(k) plan (and up to $24,500 in 2026<\/a>), but you can only contribute $7,000 to an IRA in 2025 (and up to $7,500 in 2026) unless you\u2019re at least 50 years old, in which case the limit is $8,000 in 2025 and $8,600 in 2026. <\/p>\n\n\n\n If you have a traditional IRA and withdraw from the account before age 59 \u00bd, you\u2019ll generally pay a 10% penalty and income tax. There are a few exceptions to this<\/a>, like if you withdraw up to $10,000 for a qualified first-time home purchase or lose your job and withdraw to pay health insurance premiums, under certain conditions.<\/p>\n\n\n\n As we explained above, Roth IRAs are significantly more flexible when it comes to withdrawing your contributions before retirement\u2014you can typically do this without paying taxes or penalties. But if your early withdrawal exceeds your contributions and you take out earnings, or if you had previously completed a Roth conversion, you may be subject to taxes and a 10% penalty when you file your taxes with the IRS.<\/p>\n\n\n\n If you have a traditional IRA, once you reach age 73<\/a> you have to start withdrawing at least a minimum amount of money each year\u2014this is called an RMD<\/a>. The amount you must withdraw is your account balance at the end of the previous year divided by the \u201cdistribution period,\u201d which is based on your age and set by the IRS each year. You can also calculate your RMDs using this tool from investor.gov<\/a>. Practically speaking, RMDs mean your earnings can\u2019t compound<\/a> in a traditional IRA indefinitely. This rule doesn\u2019t apply to Roth IRAs, however. If you have a Roth IRA, you typically don\u2019t have to take RMDs during your lifetime unless you inherited the account.\u00a0<\/p>\n\n\n\n IRAs can be a powerful tool for building long-term wealth. If you\u2019re thoughtful about your contributions and only invest money you won\u2019t need until retirement, the benefits of these accounts tend to outweigh the drawbacks. <\/p>\n\n\n\n We know choosing the right IRA can feel tricky, so we developed our IRA calculator<\/a> to help you determine what kind of account is right for your specific situation. Just enter your filing status, income, and a few other details and we\u2019ll help you figure out the rest. When you\u2019re ready to start saving, Wealthfront offers traditional and Roth IRAs, as well as SEP IRAs and rollover IRAs so you can save for retirement<\/a> on your own terms. <\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" Individual retirement arrangements (IRAs) are a popular way to save for retirement, and with good reason\u2014they come with numerous benefits for investors building long-term wealth. They also come with a few drawbacks you should be aware of. In this post, we\u2019ll break down what you need to know, focusing on two popular account types: traditional […]<\/p>\n","protected":false},"author":129,"featured_media":12611,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282,1278,1367],"tags":[1312,1368,2404],"coauthors":[2504],"class_list":["post-12607","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","category-planning","category-retirement","tag-ira","tag-roth-ira","tag-traditional-ira"],"acf":[],"yoast_head":"\nIRAs have more investment options than 401(k) plans<\/h3>\n\n\n\n
IRAs are more flexible and liquid than you might think<\/h3>\n\n\n\n
IRA drawbacks<\/h2>\n\n\n\n
IRAs have low annual contribution limits<\/h3>\n\n\n\n
IRAs sometimes have early withdrawal penalties<\/h3>\n\n\n\n
Some IRAs have required minimum distributions (RMDs)<\/h3>\n\n\n\n
The bottom line<\/h2>\n\n\n\n