Don't Fall Behind on Retirement Planning: How to Use Individual Retirement Accounts (IRAs) Like a Pro

I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand.

It's time for some money rehab.

More than half of Americans feel behind on retirement right now.

And even if that's not you, I'm sure you're still down for some more tips on how to land that dreamy, dreamy retired life, right?

Well, if you're a W-2 employee, you might have a 401k retirement plan through your work, but that's not the only kind of retirement account you can get.

You can also start an IRA or an individual retirement account.

These are accounts you can start yourself, no matter what your employment status looks like, even if you already have a 401k.

And if you do already have a 401k, the more retirement accounts you have, the better.

And within that account, you can invest in things like stocks, bonds, mutual funds, ETFs.

You get to choose.

So today I'm going to teach you how an IRA works.

And at the end, I'm going to teach you how to open one.

Okay, so IRAs come in two flavors, traditional IRA and Roth IRA.

You've probably heard these terms thrown around a bunch.

And if they've kind of blurred together in your brain as just retirement stuff, you're definitely not alone.

But they're not the same exact thing.

The difference between them really comes down to taxes, specifically when you pay taxes.

Let's look at each one.

A traditional IRA is what I like to call the tax now party later plan.

Here's what I mean.

When you put that money into a traditional IRA, you get to deduct that amount from your taxable income for the year.

In other words, Uncle Sam gives you a little break now for saving for your future.

So if you made 70 grand and you contribute 6K to a traditional IRA, your taxable income might go down to 64 grand.

That could lower your tax bill or even bump you into a lower tax bracket, which is a pretty sweet deal.

But, and this is a big but, you will pay taxes later.

When you retire and start pulling money out of that traditional IRA, every dollar you withdraw is taxed as regular income.

And no, you can't just let that money sit in the account forever.

The IRS wants its cut eventually.

So once you hit age 73 as of the current rules in 2025, you're required to start taking out a minimum amount each year.

These are called required minimum distributions or RMDs.

We'll talk more about RMDs in a future episode, but just know the clock does run out on that deferred money.

So that's the traditional IRA.

Tax deduction now, pay taxes later.

Now let's talk about the Roth IRA.

This is the opposite, the tax now party plan, but in reverse.

With a Roth IRA, you don't get a tax break when you contribute now.

So using the same example, if you make 70 grand and you put 6K into a Roth IRA, you still get taxed on that full $70,000 you brought in.

You've probably heard people call this post-tax money because the order of operations is that your income gets taxed and then you make your contributions with what's left.

That might feel like a big bummer, but there's a huge upside to this.

Your money grows tax-free and you do not pay any taxes when you take that money out in retirement.

Zero zilch nada.

What you see in there is what you will get.

That means every penny of growth, every dividend, every gain, every dollar of your investments earns over decades of compounding, all yours tax-free.

And unlike the traditional IRA, Roth IRAs do not have required minimum distributions.

You can leave that money in there for as long as your heart desires.

You can even pass it on to your heirs, and that's one reason why Roths are so popular.

You can even pass it on to future generations, and that's one reason why Roths are so popular as an estate planning tool.

Okay, so which one is better?

Well, you don't have to choose.

You can actually open both.

But if you're wondering which one to prioritize, you probably already know what I'm going to say.

It depends.

This is a great question for a financial advisor, by the way, but I'll give you a head start with some things to think about.

If you're in a higher tax bracket now and you expect to be in a lower tax bracket in retirement, a traditional IRA can make sense.

You get a tax deduction now when it matters most and you pay lower taxes later.

But if you're early in your career or you're currently in a lower tax bracket, student years or starting a business, then a Roth IRA is a powerful move.

You pay taxes now when they're relatively low and then you reap tax-free rewards down the road.

There's also something to be said for the psychology of it all.

With a Roth, you know what you're paying up front.

No surprises later.

With a traditional IRA, you're rolling the dice on what tax rates might look like when you retire.

And let's be honest, with government spending and deficits, what they are, taxes are probably not going to go down anytime soon.

You'll also need to think about limits.

When it comes to IRAs, the limit does exist.

You can't just dump your entire paycheck into your IRA.

As of 2025, you can contribute up to $7,000 to an IRA each year or $8,000 if you're 50 or older.

That limit is across all of your IRAs.

So if you have both a traditional and a Roth IRA, your total contribution can't be more than $7,000 combined if you're single.

Here's the catch.

Roth IRAs have income limits.

If you're single and you're making more than $161K in 2025, you can't contribute to a Roth IRA directly.

For married couples filing jointly, that cutoff is 240K.

Traditional IRAs, on the other hand, don't have income limits to contribute.

But whether you can deduct your contributions depends on whether you or your spouse has a retirement plan at work, like a 401k, and how much you earn.

I'll include a link to a Superfun IRS page with all the latest income thresholds in the show notes.

They update these numbers, by the way, almost every year.

Okay, quick side note for high earners who are like, wait, I make too much for a Roth IRA.

I still want to get that sweet tax-free growth.

Well, you can go through the back door.

That's not me being sketchy.

There's actually a move called a backdoor Roth IRA.

This is a legal workaround where you contribute to a traditional IRA, no income limits, and then convert that money right away into a Roth IRA.

There are some nuances here, especially if you already have money in a traditional IRA.

So please talk to a tax pro before doing this.

But generally, it's a solid strategy that is totally allowed under the current law.

Don't worry, I I wouldn't do you dirty.

One more important difference: withdrawal rules.

With a traditional IRA, you can't take money out before the age of 59 and a half without paying a 10% penalty plus income tax, unless you qualify for certain exceptions, like a first-time home purchase, higher education costs, or medical bills.

With a Roth IRA, you can always withdraw your contributions, not your investment gains, but your contributions tax and penalty-free.

Because remember, you already pay taxes on that money you put in.

But if you take your earnings out before 59 and a half, you'll owe tax and possibly penalties.

So Roth IRAs give you a little bit more flexibility.

They can double as an emergency fund in a pinch, though I don't necessarily recommend making that a habit.

Okay, so I know you're amped to get started.

Here's what to do next.

You can open an IRA in a brokerage account.

My fave is public.

On public, both traditional and Roth IRA accounts are available.

With a self-directed IRA on public, you can access thousands of stocks, ETFs, and bonds to align your investing style with your retirement goals.

If you prefer to set it and forget it, you can schedule recurring contributions to a pre-made investment plan or build your own with up to 20 assets.

And for a limited time, if you already have an IRA, you can earn an uncapped 1% match when you roll over an old 401k or transfer an IRA from another brokerage over to public.

Plus, you can earn a 1% match on your annual contributions.

You can open one up today at public.com/slash moneyrehab.

For today's tip, you can take straight to the bank.

When you do start an IRA, please do not forget to actually make investments with it.

When you create the IRA, you're going to be prompted to put money into the account, but that is not the last step.

And unfortunately, I see this all the time.

You actually need to invest with that money or else you're not going to be taking advantage of the account.

So open the account, fund it, and then please invest it.

That's how you turn retirement savings into real wealth.

Paid for by public investing.

Full disclosures in the podcast description.

Money Rehab is a production of Money News Network.

I'm your host, Nicole Lapin.

Money Rehab's executive producer is Morgan Lavoie.

Our researcher is Emily Holmes.

Do you need some money rehab?

And let's be honest, we all do.

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And lastly, thank you.

No, seriously, thank you.

Thank you for listening and for investing in yourself, which is the most important investment you can make.