Investing

So, What Exactly Is an IRA?

Published on November 21, 2017

No matter where you are in your career, you’re probably well aware that you should be saving for retirement. But for investing newbies, the alphabet soup of retirement account options can be overwhelming.

But IRAs are worth learning more about—and potentially investing in, if you can. Read this guide to learn why, and how you can get started today.

What is an IRA?

IRA stands for Individual Retirement Account. It’s a savings account that you can use to put away money for retirement, potentially grow your funds through investment, and often get tax breaks.

The most common types of IRAs are traditional and Roth IRAs. Traditional IRAs let you deduct your contributions up-front and pay taxes on distributions when you retire, while Roth IRAs don’t let you deduct contributions but allow you to withdraw money tax-free in retirement. You can only contribute the maximum amount to a Roth IRA if you make less than a certain amount of money. Not sure? Use our IRA Calculator to get some quick and easy guidelines.

Why should I open an IRA?

Anyone who is earning income can open an IRA. It’s a no-brainer if you don’t have access to an employee-sponsored plan, such as a 401(k) or a 403(b). Almost everyone should be saving for retirement, and financial professionals generally recommend investing that cash so it has the opportunity to grow, rather than letting it sit around in a checking or savings account. Besides the opportunity to invest in a wide range of assets, you can also take advantage of tax perks—either paying lower taxes today with a traditional IRA or withdrawing funds tax-free when you’re older with a Roth IRA.

You can also open an IRA to supplement your retirement plan at work, especially if you’ve already contributed the annual maximum. If you’re leaving your job, you can rollover funds from a 401(k) or 403(b) into an IRA (there’s no cap on how much you can transfer, and, depending on how you handle it, no tax consequence). That may give you access to better investment options—not to mention consolidates all your accounts in one place.

If you’re self-employed, you’ll want to look into SEP IRAs, which may allow you to contribute more each year than the Roth or Traditional IRAs, depending on how much you earn.

How much should I contribute?

If you’re still a ways out from retirement, and if you can afford it, contribute up to the maximum limit—that’s $5,500 for 2017—every year. (When you’re older than 50, you can contribute more.) Even if you can’t afford that, you’ll most likely want to throw in as much as you can. Until you’re well on track for retirement, most financial professionals recommend prioritizing IRA contributions over saving for a down payment or for your kids’ college education. Anything you put away early on has the opportunity to grow over time, thanks to the power of compound interest. Of course, everyone’s circumstances are different, so it always pays to talk to a financial advisor. And with all matters tax related, be sure to talk to your tax advisor so that you can see what is most appropriate for your unique circumstances.

How should I use my IRA funds?

If you’re decades away from retirement, you don’t want to let your retirement savings sit in cash or money-market accounts. Yes, they’re low risk, but you might pass on an opportunity to grow your savings through investment. The easiest way to invest is to choose a “target date fund,” which is a mutual fund geared toward the year you plan to retire. These will automatically switch up your mix of stocks, bonds, and other investments so that you’re more aggressive when you’re younger and more conservative when you get closer to retirement. Try to choose funds that have an expense ratio—or annual fee—below around 0.4%. Not sure if you are on track for retirement? Use a retirement calculator to figure out where you stand.

How do I open an IRA?

SoFi Wealth makes opening an IRA easy. Sign up for a SoFi Wealth account online, in less than five minutes. And if you have any questions or want personalized advice, you can set up a call with a SoFi Wealth advisor—absolutely complimentary.



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SoFi Wealth, LLC does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.

The SoFi Wealth platform is operated and maintained by SoFi Wealth LLC, an SEC Registered Investment Advisor. Brokerage services are provided to clients of SoFi Wealth LLC by SoFi Securities LLC, an affiliated broker-dealer registered with the Securities and Exchange Commission and a member of FINRA / SIPC. Investments are not FDIC Insured, have No Guarantee and May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Clearing and custody of all securities are provided by APEX Clearing Corporation.

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