IRAs: A Flexible Tool for Life’s Goals

When people think IRAs, they think retirement savings. And why not? IRA stands for “Individual Retirement Account,” after all. But IRAs can be used for many purposes. If you need to save for multiple goals, or maybe aren’t sure how much to save, setting up an IRA can be a flexible way to plan for the future.  

First, some basics. There are two types of IRAs for most investors: Traditional and Roth. As the table shows, these types have different tax advantages and qualifications. But at heart, IRAs encourage people to save for retirement by deferring the taxes that would have to be paid each year on their gains. And they keep people focused by assessing a penalty on withdrawals prior to retirement age.  

Traditional versus Roth IRAs: Which One Is Right for You? 

	Traditional IRA	Roth IRA
2023 and 2024 Contribution Limits	Under age 50, you can contribute up to $6,500/year in 2023 and $7,000/year in 2024.   Over 50, you can contribute up to $7,500/year in 2023 and $8,000/year in 2024.   Note: You can’t contribute more in a year than you earn.	Same
Taxes	You may receive a tax deduction on your contributions.   You pay taxes when you withdraw from your account at your income tax rate at that time. Distributions are added to your income for the year, so depending on the amount of the withdrawal and your other income, they can push you into a higher tax bracket.*	You pay tax on the amount when you contribute, but no taxes are due on withdrawals if the following withdrawal conditions are met.
Required Minimum Distributions (RMDs)	You must start taking required minimum distributions from your account, and pay tax on them, no later than age 73.	No withdrawals are required until the death of the original account holder.
2023 and 2024 Eligibility Requirements	Available to anyone who receives taxable compensation.	Available to those who have taxable compensation and whose modified adjusted gross income is phased out between $138,000 – $153,000 in 2023 and $146,000 – $161,000 in 2024 for taxpayers filing as single, head of household or married filing separately. For married couples filing jointly or qualifying widow(er), the phase out is from $218,000 – $228,000 for 2023 and $230,000 – $240,000 for 2024.
Withdrawal of Contributions	You are subject to income taxes regardless of your age at the time of the withdrawal and a 10% IRS penalty if you withdraw funds from your account before age 59 ½, with some exceptions.	Contributions may be withdrawn without penalty or taxes at any time. Earnings on contributions will be taxed and subject to a 10% IRS penalty if you withdraw funds from your account before age 59 ½. You are exempt from the penalty and taxation if you are over age 59 ½ and have held the account for five years.

For a more detailed comparison of Traditional and Roth IRAs, check out “Building Your Retirement Savings.”

An IRA Is There When You Need It the Most

Federal tax law allows people to tap their IRAs before retirement for many life events, like buying a home or pursuing a postgraduate degree. You would have to pay taxes on the money you take out — just as you would if you saved in a taxable account — but you don’t incur the 10% penalty for withdrawing before age 59 ½. That makes the IRA a flexible savings tool.

Here are several ways you can tap an IRA without incurring penalties. We recommend you consult with a tax advisor prior to using any of these strategies.

• Small business owners and self-employed individuals. A Simplified Employee Pension IRA (SEP IRA) is a type of Traditional IRA that lets small-business owners and self-employed individuals contribute up to the lesser of 25% of an employee’s compensation, or $66,000 in 2023 and $69,000 in 2024 toward retirement annually. SEP IRA contributions are tax-deductible, and investments grow tax-deferred until retirement, when distributions are taxed as income. 

• Buy a home. You can use up to $10,000 from an IRA to buy, build or rebuild your first home or help other immediate family members buy a home. The $10,000 is a lifetime limit, and you can’t have owned a home in the past two years. If you’re married, your spouse can also withdraw from his or her IRA, for a total of $20,000.  

• Higher-education expenses. You can use IRA money to pay for college for yourself, your spouse, or your children or grandchildren without penalty. Qualifying higher education expenses include tuition, room and board, fees, books and supplies. Using an IRA isn’t necessarily the best way to save for college; our typical guidance to clients is to focus on  Coverdell Education Savings Accounts and Uniform Gift/Transfer to Minor Account (UGMA/UTMA)  accounts. But having a well-funded IRA is an appealing backup when those college bills come due. 

• Help secure your spouse’s future. Ordinarily, you can’t open an IRA without earned income. But that doesn’t apply to spouses. A “spousal IRA” allows a nonworking spouse to have a Traditional IRA without having earned income. The working spouse contributes to the IRA, and the money can benefit your spouse or enhance the overall savings of a married couple. 

• Educate a young person about money. Encourage your children to open a low minimum IRA to learn saving habits and how investing works. To qualify, the child’s money must come from “earned income” — income from babysitting and mowing lawns, for example, but not an allowance. You must be able to document where the money came from; a tax advisor can help you sort out the rules if need be. Your children can contribute income they earn each year up to a maximum of $6,500 in 2023 and $7,000 in 2024, but they don’t need that much to get started. Your child can open an account with just $50 a month. 

• Military service. If you’re a qualified military reservist and called into active service, you can withdraw money from your IRA without penalty. To qualify, you must have been called to active duty for more than 179 days. 

Help Pay for a Serious Illness 

If you have unreimbursed medical expenses greater than 10% of your adjusted gross income, you can tap your IRA without penalty to pay for them. You can also use the funds to pay for medical insurance if you lose your job and to provide income for yourself if you can’t work if you become disabled. 

Invest in Your Own Business 

A rollover for business startups (ROBS) enables you to use IRA funds to start up or invest in your own business. A ROBS isn’t a loan, so you don’t have to pay it back or make interest payments. 

A Staple for Retirement Savings 

Of course, you could use IRA savings for retirement. Even if you have an established workplace retirement account, opening an IRA and maximizing your annual IRA contributions is a great way to supplement your retirement income and reinforce your retirement readiness. 

If you want to take advantage of this flexible savings option, we’re here to help. We’ll work with you to help you consider your goals, evaluate your account options and select your appropriate portfolio. Call or click today, and we’ll help you make the right choice for your situation. 

Birth of a New Child 

The SECURE Act added the birth of a new child to the list of hardship exceptions to the 10% early withdrawal penalty.  An IRA owner may withdraw $5,000 penalty-free for the birth or adoption of a new child.  Each parent may claim the exception if they each have their own IRA account.  This allows a family to withdraw $10,000 penalty free for the birth of a new child. Parents must claim the exception within one year of the birth or adoption of the child.   

Related Documents

• IRA Account Application 
• IRA Rollover Form Instructions