July 10, 2024
Learn how IRAs work, including IRA tax advantages and other IRA benefits, and understand the difference between an IRA and 401(k), with our at-a-glance guide to individual retirement accounts.
One of the most popular—and useful—tools you can use for retirement savings is an individual retirement account (IRA).
Think of an IRA as a bucket that you can fill with stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investment vehicles.
The investments in your IRA bucket provide tax advantages that regular investments don’t offer. Even better, the money you invest in an IRA is compounded tax-free year over year, helping your nest egg grow over time.
Here are some common questions about how an IRA works and whether it could be a good option for you as you save for retirement.
Traditional IRA vs Roth IRA: Which should I choose?
It depends on your goals. The biggest difference between traditional IRAs and Roth IRAs is how they’re taxed. There are also differences related to withdrawals and required distributions.
Roth IRA: “Tax-free.”
- You invest after-tax dollars in a Roth IRA.
- If you take withdrawals before age 59 ½ and the account is less than five years old, you may be subject to taxes and a 10% penalty.
- You’re not taxed on withdrawals after age 59 ½ and as long as you’ve held the account for five years.
- Roth IRAs do not have required minimum distributions (RMDs).
- Roth IRAs can be useful if you’re a younger investor and are in a lower tax bracket than you expect to be as you progress in your career.
Traditional IRA: “Tax-deferred.”
- You may be eligible to receive a tax deduction on the money you contribute to your traditional IRA each year.*
- As with a Roth IRA, if you withdraw money before age 59 ½ you may be subject to a 10% penalty in addition to taxes.
- Distributions after age 59 ½ will be taxed as ordinary income.
- Traditional IRAs require you to take RMDs starting at age 73.
Learn more about different types of IRA accounts.
When can I open an IRA, and how much can I contribute to an IRA?
You can open either a Roth or traditional IRA by the tax filing deadline of the previous year. If you open a traditional IRA, you may be able to deduct your contribution and reduce your taxable income for that tax year.*
The amount of money that you contribute to an IRA before the tax deadline counts toward the prior year’s limit ($7,000 for tax year 2024). For example, if you open a new IRA in January, you could jumpstart your investment by contributing $7,000 before the tax deadline and then another $7,000 (or whatever the current limit) before the tax deadline of the following year.
Should I choose an IRA, a 401(k) or both?
Many people have both an IRA and a 401(k), because they both will help toward their retirement goals. Here’s a look at the requirements and benefits of each.
| IRA | 401(k) | |
|---|---|---|
| Maximum annual contribution | $7,000/year ($8,000 if age 50+) | $23,000/year ($30,500 if age 50+) |
| Setup | You set it up yourself through your bank or an investment broker, like U.S. Bancorp Investments. An IRA is also a common option for those whose employers don’t offer a 401(k) (such as those who are self-employed, own their own business or are part of the gig economy). | A 401(k) is usually part of an employer’s benefits package, where they have an agreement with an investment broker to offer investments. |
| Investment options | You can choose any mix of investments to include in your IRA. You can make these decisions yourself or use a guided investment solution to fill your bucket. | An employer-sponsored 401(k) plan usually has limited investment options, and many times your portfolio is added to a general target-date fund (the year you’re aiming to retire). |
Maximum annual contribution
IRA $7,000/year ($8,000 if age 50+)
401(k) $23,000/year ($30,500 if age 50+)
Setup
IRA You set it up yourself through your bank or an investment broker, like U.S. Bancorp Investments. An IRA is also a common option for those whose employers don’t offer a 401(k) (such as those who are self-employed, own their own business or are part of the gig economy).
401(k) A 401(k) is usually part of an employer’s benefits package, where they have an agreement with an investment broker to offer investments.
Investment options
IRA You can choose any mix of investments to include in your IRA. You can make these decisions yourself or use a guided investment solution to fill your bucket.
401(k) An employer-sponsored 401(k) plan usually has limited investment options, and many times your portfolio is added to a general target-date fund (the year you’re aiming to retire).
How do I manage an IRA?
| Automated investing | Self-directed investing | Financial professional | |
|---|---|---|---|
| Offered exclusively by U.S. Bancorp Investments | Offered exclusively by U.S. Bancorp Investments | ||
| Who manages it? | Robo-advisor | You | A financial professional |
| Effort | Low | High | Varies |
| How does it work? | The robo-advisor builds an online investment portfolio for you based on your goals and preferences. It monitors and adjusts your account as the market fluctuates. | Gives you complete freedom if you’re an experienced and hands-on investor. You can buy and sell specific investments online. | You’ll work with a professional to create a financial plan that is aligned with you retirement goals. |
| Works well if… | you are starting out and want a diversified mix of investments selected and managed for you. | you are confident in making your own investment decisions. | you have more sophisticated or complex financial needs or prefer personal guidance. |
| More information | Automated Investor from U.S. Bancorp Investments | Self-directed investing | Find a wealth specialist |
Automated investing Offered exclusively by U.S. Bancorp Investments
Self-directed investing Offered exclusively by U.S. Bancorp Investments
Financial professional
Who manages it?
Automated investing Robo-advisor
Self-directed investing You
Financial professional A financial professional
Effort
Automated investing Low
Self-directed investing High
Financial professional Varies
How does it work?
Automated investing The robo-advisor builds an online investment portfolio for you based on your goals and preferences. It monitors and adjusts your account as the market fluctuates.
Self-directed investing Gives you complete freedom if you’re an experienced and hands-on investor. You can buy and sell specific investments online.
Financial professional You’ll work with a professional to create a financial plan that is aligned with you retirement goals.
Works well if…
Automated investing you are starting out and want a diversified mix of investments selected and managed for you.
Self-directed investing you are confident in making your own investment decisions.
Financial professional you have more sophisticated or complex financial needs or prefer personal guidance.
More information
Automated investing Automated Investor from U.S. Bancorp Investments
Self-directed investing Self-directed investing
Financial professional Find a wealth specialist
Learn more
Visit usbank.com
Find an advisor
844-235-8368
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Disclosures
*Your deduction may be reduced or eliminated based on income.
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Investment and insurance products and services including annuities are:
Not a deposit • Not FDIC insured • May lose value • Not bank guaranteed • Not insured by any federal government agency.
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