A traditional individual retirement account is an account you open through a brokerage of your choice like Charles Schwab, Vanguard, MorganStanley, Edward Jones, etc. This is a self-directed plan which means you deposit the money on your own either through automatic deposit or standard deposits. This is different from an employer sponsored 401k who automatically deposits for you. You can have both, FYI and max them out each every year but we’ll get to that.

For a traditional IRA, there are no income restrictions but there are contribution limits as with 401ks. IRAs (Roth and traditional) have annual limits of $7,000 if you’re under 50 or $8,000 if you’re 50 and older. Many people have both a 401k and an IRA of some kind so they can max out the tax benefits which are over $30,000 annually! Most people can reduce their taxable income from both accounts at tax time which can drastically reduce how much they pay in taxes, or receive every April when filing is due.

Since an IRA is a self-directed account it does mean you need to appoint money manually either or set up and automated deposit to it and then choose how you want the money to grow—ETFs, stocks, etc. For beginners, the easiest and most affordable is ETFs like VOO, VTI, etc. These are ETFs (funds of multiple stocks like Apple, Disney, Meta, etc) and are far cheaper than purchasing individual stocks while also having annual returns averaging 6-7% at least, often double in many years!) Roth IRAs work the same in this regard.

For example: In the VTF VOO (which I personally buy most of my shares in for my IRA), these are the top 10 stocks you’re investing in right now:

I have a traditional IRA and Roth IRA through SoFi where I can manage and buy shares (or partial shares) of these ETFs and they grow every year. However much I deposit, I pick between VOO and others like QQQM or VUG and keep upping how many shares I have. My money grows from there on its own. With the traditional IRA, it’s pretax income so you will be taxed on it after you begin withdrawing in retirement and the Roth you do not. Like 401ks, the contributions are the same across IRAs but you can utilize both for different purposes. Talk to your CPA if you should get both and how your income is best allocated. It’s different for everyone.

For information on Roth IRAs, check the next blog!