IRA Basics: What They Have in Common
An IRA (Individual Retirement Account) is a personal retirement savings account you open and manage yourself - separate from an employer-sponsored plan like a 401(k). Both Roth and Traditional IRAs share several features:
- 2025 contribution limit: $7,000 per year ($8,000 if you're 50 or older)
- Must have earned income to contribute (wages, salary, self-employment income)
- Wide investment choice - stocks, ETFs, mutual funds, bonds, and more
- Held at a brokerage - Fidelity, Vanguard, Charles Schwab, etc.
- Both offer tax-advantaged growth - either tax-deferred (Traditional) or tax-free (Roth)
The single biggest difference: when you pay tax on the money.
2025 Contribution Limits and Income Limits
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| 2025 contribution limit | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) |
| Phase-out begins (single) | $150,000 modified AGI | $79,000 (if covered by workplace plan) |
| Ineligible above (single) | $165,000 | $89,000 (for deductibility) |
| Phase-out begins (married) | $236,000 | $126,000 |
| Ineligible above (married) | $246,000 | $146,000 |
| Tax on withdrawals | 0% (qualified) | Ordinary income rate |
| Required Minimum Distributions | None (Roth IRA) | Age 73 |
If your income exceeds the Roth IRA limit, you can use the "backdoor Roth" strategy: contribute to a non-deductible Traditional IRA (no income limit), then immediately convert it to a Roth IRA. Congress has not eliminated this strategy as of 2025. Consult a CPA before executing, as the "pro-rata rule" can create complications if you have other Traditional IRA balances.
How to Choose: A Simple Framework
The maths depends on comparing your current tax rate to your expected retirement tax rate. Since we can't know the future, here are practical rules of thumb:
- Choose Roth if: You're early in your career, expect income to grow significantly, or expect tax rates to rise. Also prefer Roth if you want more flexibility (no RMDs, access to contributions).
- Choose Traditional if: You're in a high tax bracket now (32%+) and expect to be in a lower bracket in retirement. Also useful if you need the immediate tax deduction.
- Do both: Many financial advisers suggest contributing to both to account for future tax uncertainty. The total across both cannot exceed $7,000.
- Prioritise employer 401(k) match first: Before maxing either IRA, always capture the full 401(k) employer match - it's an instant guaranteed return no IRA can match.
If you're under 40 and in the 22-24% tax bracket or below: Roth IRA is usually the better choice. Paying tax now at a moderate rate and enjoying decades of tax-free compounding is typically worth more than the immediate deduction. Roth's flexibility (no RMDs, contributions withdrawable anytime) is also valuable. Most financial planners recommend Roth for early-career investors.
What to Invest in an IRA
IRAs held at major brokerages (Fidelity, Vanguard, Schwab) give you access to a very wide range of investments. For most long-term retirement savers:
- Start with a low-cost global equity index fund or target-date fund
- Keep costs below 0.20% per year - Fidelity Zero funds have 0% expense ratio
- Don't over-complicate with too many funds - one or two broadly diversified funds is sufficient for most people
- As retirement approaches, gradually add bond funds for stability