Saving for retirement can feel overwhelming, especially when there are so many account types and rules to understand. One of the most common and effective options for individuals is the Individual Retirement Account, or IRA. These accounts offer tax advantages that can make a big difference over time, but it’s important to know which type fits your needs.
A tax-deferred account allows you to delay paying taxes on your contributions and investment gains until you withdraw the money in retirement. This setup can be a powerful tool for people who expect to be in a lower tax bracket later in life, since it allows them to save more now and pay less in taxes down the road. If you’ve ever wondered how to get started, one of the most straightforward steps is to open a traditional ira.
Understanding the Basics
A traditional IRA lets you contribute pre-tax dollars, which can reduce your taxable income in the year you make the contribution. The investments then grow tax-deferred, meaning you don’t pay taxes on dividends, interest, or capital gains until you begin withdrawals. At that point, distributions are taxed as ordinary income.
For many people, this system makes sense because it provides both short-term tax relief and long-term growth potential.
Contribution Rules and Limits
The IRS sets annual contribution limits that dictate how much you can save. For 2025, individuals under 50 can contribute up to $6,500, while those 50 and older can contribute up to $7,500 thanks to catch-up provisions. These contributions may be fully or partially deductible depending on your income and whether you or your spouse are covered by an employer retirement plan.
It’s important to stay within these limits to avoid penalties and to maximize the tax benefits of the account.
When and How to Get Started
The sooner you start, the better. Even small contributions made early can grow significantly thanks to compounding interest. Setting up an account is generally straightforward—you choose a provider, complete an application, and decide how to fund it. Many people set up automatic transfers from their checking accounts to ensure consistent contributions.
Investment Choices Inside an IRA
A traditional IRA isn’t just a savings account—it’s a container for investments. Inside the account, you can hold a wide variety of assets:
- Individual stocks and bonds.
- Mutual funds and ETFs.
- Target-date funds designed to adjust risk as you approach retirement.
This flexibility allows you to tailor the account to your risk tolerance and timeline. Younger investors might lean heavily on growth-oriented stocks, while those nearing retirement might prefer more conservative bonds.
Things to Watch Out For
While tax-deferred accounts are powerful, there are rules to be aware of:
- Withdrawals before age 59½ typically come with a 10% penalty, in addition to income tax.
- Starting at age 73, required minimum distributions (RMDs) must begin, whether you need the money or not.
- Contributions may not be fully deductible if your income exceeds certain thresholds.
Knowing these rules ensures you get the benefits without unexpected surprises.
Why It’s Worth It
For many savers, a traditional IRA represents a balance of immediate tax savings and long-term growth. It allows you to reduce your taxable income today while building a nest egg for tomorrow. Combined with employer-sponsored plans or other personal savings, it forms a strong foundation for retirement security.
Companies like SoFi have made it easier than ever to open and manage retirement accounts with user-friendly platforms and clear guidance. Whether you’re just starting your career or preparing for retirement, having a tax-deferred account can be a cornerstone of your financial plan.
