The land of tax-advantaged retirement accounts like IRAs can sometimes be tricky to navigate. After all, there is a lot to know about both IRS rules and the way retirement accounts work. What's more, the way the products are positioned and sold can vary across financial institutions and it's not always obvious to investors why that may be. For instance, you can buy a CD from a bank and hold it as a standalone IRA. But you can also buy a brokered CD through a company like Fidelity and hold it in a brokerage IRA that can also hold stocks, mutual funds, and other types of investments. The good news is that financial service providers like Fidelity can help clear up concerns and questions about investing in IRAs.
1. Misconception: An IRA is an investment. Fact: An IRA is a type of account.
Saving money for your financial future is a huge accomplishment. Once you've contributed to an IRA, it's important to take the next step and choose investments that may help your money grow. Investing for potential growth can help ensure that you'll be able to hit your goals and could even help you reach your goals sooner than you could otherwise.
The terminology can be confusing, though. Since an IRA is a type of account, the IRA designation can apply to a single certificate of deposit, for instance, an IRA CD sold by a bank. It can also be applied to a brokerage account, which can offer numerous investment options including CDs, stocks, bonds, mutual funds, and ETFs.
To be sure that your savings are invested the way you intend, make sure you understand what you're getting when you sign up for an account, how to choose investments, and how to add money.
If you're not sure how to invest your IRA and don't have the time to do it or interest in managing your own investments, Fidelity offers several options for professional investment management.
A managed account is exactly what it sounds like—an investment account managed by investment professionals. One of the main benefits of a managed account is that your investments are chosen by professionals to align with your time frame, risk tolerance, and financial situation and then they are rebalanced regularly to help your plan stay on track. Managed accounts can also offer tax-loss harvesting and other tax-efficient investing techniques. In some cases, comprehensive financial planning and generational strategies may be offered.
The cost of a managed account generally corresponds to the complexity of financial needs and services required or it could be based on the amount of assets you have available to invest.
A robo advisor is an affordable digital financial service that uses technology to help automate investing based on information investors provide about themselves and their financial situation. "Robo" refers to these services being almost completely digital, and that computers, smartphones, or tablets are used to access and interact with your accounts. "Advisor" speaks to the investment advisors that offer digital advice and account management services, often for a lower fee than traditional investment advisory services. Learn about Fidelity's robo advisor: Fidelity Go®
For more comprehensive solutions, consider personalized investment management.
2. Misconception: I can only have one type of IRA. Fact: If you're eligible, you can contribute to different types of IRAs.
Contributing to a Roth IRA and a traditional IRA is absolutely allowed as long as you're eligible. The key thing to know is that the annual contribution limit is an aggregate amount among traditional and Roth IRAs.
If you have a traditional IRA, a Roth IRA―or both―the maximum combined amount you may contribute annually across all your IRAs is the same.
In 2024, the contribution limit is:
- $7,000 (under age 50)
- $8,000 (age 50 or older)
Keep in mind that you can contribute to an IRA for the prior year up until the tax-filing deadline for that tax year. This may allow you to make 2 contributions in a single calendar year, although they will be counted as being made in 2 separate tax years.
Learn how much you can contribute and decide which IRA may be right for you. Calculate your IRA contribution limit
3. Misconception: You can't contribute to a 401(k) and an IRA. Fact: You can contribute to a 401(k) and an IRA in the same year.
The nuances here are important to understand. Everyone with taxable compensation can contribute to a traditional IRA. If you and/or your spouse are contributing to a workplace retirement plan or are covered by a retirement plan at work, like a 401(k), and your income is above a certain level, your ability to deduct your traditional IRA contribution may be limited.
With a Roth IRA, your contribution is made with after-tax dollars and is not tax-deductible, but your money can grow federally tax-free and your withdrawals are tax-free in retirement, provided that certain conditions are met.1 This is different from a traditional IRA: Withdrawals from traditional IRAs are taxable. Eligibility to contribute to a Roth IRA does not depend on a retirement plan at work for you or your spouse. As long as your modified adjusted gross income (MAGI) is below the annual limit and you have taxable compensation equal to or greater than your contribution, you can contribute to a Roth IRA.2
Here is a list of income and contribution limits for contributing to traditional and Roth IRAs: IRA contribution limits
4. Misconception: You can't withdraw money from an IRA until you're 59½. Fact: There are some options for penalty-free withdrawals before retirement.
Many people are understandably wary about the idea of saving their money and being penalized if they need it. And it is true that there is a 10% early withdrawal penalty levied on withdrawals taken from an IRA before age 59½.
But there are some exceptions to that rule. Taxes will be due on withdrawals of tax-deductible contributions and withdrawals of earnings on any contributions, but the 10% penalty may not apply if you withdraw for any of the following reasons:
- Up to $10,000 for qualified first-time home purchases
- Qualified higher education expenses
- Health insurance premiums while unemployed
- Total and permanent disability
- Withdrawals by beneficiaries of an inherited IRA
- Qualified birth or adoption distribution
Roth IRAs allow for the same penalty-free exceptions as traditional IRAs but it's important to know that you will owe taxes on withdrawals of earnings before age 59½ unless it's for a first-time home purchase. You can withdraw your contributions from a Roth IRA anytime, tax- and penalty-free.
Once you're over age 59½ and the account has been open for 5 years, qualified withdrawals of both earnings and contributions from a Roth IRA are tax-free.
5. Misconception: The beneficiary designation on retirement accounts is not a big deal. Fact: The beneficiaries listed on financial accounts can be a critical piece of your estate plan and it's important to keep them updated.
For many people, retirement accounts hold most of their life savings and may represent a sizable part of an estate. Assigning beneficiaries is one of the easiest and most effective estate planning steps you can take. That's because the beneficiaries named on financial accounts (like IRAs, workplace savings plans, insurance policies, and brokerage accounts) typically trump any instructions you may provide in a will.
In today's busy world, just setting up your account and getting your contributions in can be a lot to handle on top of everything else you have going on. But taking the time to make sure your beneficiaries are listed and correct may help provide peace of mind that you're doing everything you can to provide for your future and that of your loved ones.
If you have accounts at Fidelity, learn how to update your beneficiaries.
