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Opening an IRA in 2024 could be a smart financial choice. But read on for key questions you’ll want to ask before opening a brokerage account and investing.
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An IRA is a tax-advantaged retirement account. You can invest in it and deduct your contributions. You can then allow the money to grow tax-free until you need it in your golden years.
IRAs are great because you don’t need an employer to offer one to you, like you do with a 401(k). You can open one easily with just about any brokerage firm. But should you? Is opening an IRA a good move for your personal finances in 2024? Ask yourself these questions to decide.
Are you eligible to make deductible contributions?
One of the big benefits of contributing to an IRA is that you may be able to claim a tax deduction. But if either you or your spouse is covered by a workplace retirement plan, then you may not be eligible to make deductible contributions once your income is above a certain threshold.
The table below shows the rules if you are personally covered by a 401(k) or other workplace plan.
If you don’t have a workplace plan but you’re married and your spouse is eligible for one, you can claim a full deduction with income up to $230,000, a partial deduction with income between $230,000 and $240,000, and no deduction once your income exceeds that amount.
You’ll want to confirm you’re eligible to make deductible contributions before opening your IRA.
Would you prefer to claim your tax savings now or in the future?
As mentioned above, the IRA contribution limit is $7,000, or $8,000 for those age 50 and over who can make catch-up contributions. This limit applies to a combination of your traditional and Roth IRA contributions though. In other words, you can contribute a total of $7,000 or $8,000 across both accounts — not $7,000 into a traditional IRA and $7,000 into a Roth IRA.
This means you’ll need to decide between these two accounts. They work differently, so this can be a hard choice. An IRA comes with a tax break in the year you contribute, just like a traditional 401(k). A Roth IRA doesn’t, but it allows tax-free withdrawals in retirement. By contrast, you pay taxes on distributions from both a traditional IRA and traditional 401(k).
If you think your tax rate will be higher as a senior, you may be better off with a Roth instead of a traditional account. Or, if you’re not sure and you’re already contributing to a 401(k) at work, you may want to mix things up and choose a Roth so you’ll have some accounts offering upfront tax breaks and some offering tax breaks later.
Do you have spare money to invest in an IRA?
Finally, you’ll need to ask yourself if you have spare money to invest in an IRA. If you aren’t already earning your full employer matching contribution to your 401(k), you should probably do that first. If you still have some extra money to devote to retirement savings after that, then opening an IRA could be a smart choice.
By asking yourself these questions, you can decide if opening an IRA in 2024 is the right move for you. If you decide it is, check out the best brokerage firms for IRAs to find an account and get signed up today.
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