IRA's are the KEY to saving for retirement. Check out this free mini-class to learn the basics of how they work, contributions, withdrawals and a nifty spreadsheet!

RE403: IRA Account Fundamentals

IRA's are the KEY to saving for retirement. Check out this free mini-class to learn the basics of how they work, contributions, withdrawals and a nifty spreadsheet!

If you’re just stopping by for the first time, this is a class in a series of classes over the next few months which will culminate in the development of a complete financial plan.  Stop by HERE for a complete list of classes currently available and HERE for more information about the website.

Class Objectives: To learn about the rules regarding IRA accounts as well as how they can help you achieve your retirement goals.
Prerequisites: SA302: Investing Basics-Time Value of Money, RE401: Calculating Retirement Needs, and RE402: Qualified Retirement Accounts
Handout: none
Assignment: This is the same spreadsheet as class RE402.


You’re likely already familiar with Individual Retirement Accounts, or IRA’s, as they are more commonly known. There are many types of IRA accounts, but we will only be covering the two most common types in this class (the other types are generally for self-employed people):

  • Traditional IRA: Contributions are generally deductible (income limits apply), but the investments grow tax-deferred until the time of withdrawal. At that point, all distributions are fully taxable at ordinary tax rates.
  • Roth IRA: Contributions are never deductible, but the investments grow tax-free and the entire distribution (assuming requirements are met) is not taxable.

IRA’s provide an additional opportunity for people to contribute to money in tax-advantaged accounts that help the funds grow more than would be possible in a standard taxable brokerage account. They are available to those that are self-employed as well as individuals that either do not have an employer-sponsored plan available to them or make a low enough income to qualify to contribute to the IRA as well as the employer plan.

Some of the advantages to investing in an IRA include:

  • Tax-deductible, tax-deferred or tax-free benefits
  • Easy to open and start contributing
  • Many investment options
  • Opportunity for low investment fees

Some of the things to consider when you are considering opening an IRA include:

  • There will be limited availability to your money until age 59 ½
  • The maximum contribution is relatively low, so it may not fully fund your retirement without other supplemental accounts
  • There are income limitations to being able to contribute or deduct contributions to IRA’s

Using an IRA can help you accelerate your retirement savings. Don’t underestimate the tax benefits!


All major brokerage firms offer IRA accounts. Some of the most popular low-cost brokerage firms that offer great IRA account options include Fidelity, Vanguard, and Charles Schwab. They each have varying minimum balance requirements, rules and incentives for opening accounts, so be sure to do some research. I suggest starting with the Simple Dollar’s review of the Best IRA Accounts of 2017.

It’s as simple as opening a bank account and we all know that sooner is always better when it comes to any kind of saving. However, this is especially true of retirement savings where there is the opportunity for decades of growth.


Since the individual retirement accounts we are discussing are not sponsored by employers, it will be completely up to you to set it up and contribute funds. In order to contribute to an IRA, you must have received taxable compensation during the year.

Traditional IRA: Contribution limits are the lesser of taxable compensation for the year or $5,500 for 2016 & 2017. There is a catch-up contribution for those age 50 and over in the amount of $1,000. The deadline for contributing to an IRA is the deadline of the tax return without extensions, generally April 15th. Contributions to a Traditional IRA are allowed up until age 70 ½.

This contribution is tax-deductible if certain requirements are met. Contributions can be made by anyone up to the contribution limits above, however they are only deductible for those that meet the modified adjusted gross income requirements. The rules for whether contributions are deductible are shown in the chart below for 2017. You need your tax filing status and modified adjusted gross income to determine your eligibility.2017 Tax Deductible Contributions to Traditional IRA AccountsRoth IRA: Contribution limits are the lesser of taxable compensation for the year or $5,500 for 2016 & 2017. There is a catch-up contribution for those 50 and over in the amount of $1,000. The deadline for contributing to an IRA is the deadline of the tax return without extensions, generally April 15th. Contributions to a Roth IRA are allowed even past age 70 1/2 (assuming there is taxable compensation).

Roth IRA contributions are not tax-deductible under any circumstances since instead they grow and are distributed tax-free. However, unlike a traditional IRA, individuals have to meet a certain income requirement to be able to make contributions. These are shown below.2017 Roth IRA Contribution LimitsMore detailed rules, explanations, and worksheets are provided in the IRS’s Publication 590-A “Contributions to Individual Retirement Arrangements” (2016 is the latest edition available).


The IRA withdrawal rules are similar to those of employer-sponsored plans, with a few exceptions. Just like employer-sponsored plans, withdrawals from IRA’s are subject to a 10% penalty if withdrawn before age 59 ½ if you don’t meet an exception.

The exceptions to the 10% penalty for retirement distributions from both Traditional and Roth IRA’s include:

  • Medical expenses over 10% of AGI
  • Distributions for medical insurance due to unemployment
  • Qualified higher education expenses
  • Purchase or construction of a first home
  • Total and permanent disability
  • The IRA is inherited and you are the beneficiary
  • You receive the distributions in the form of an annuity
  • The distribution is an IRS levy

Traditional IRA: As a general rule, distributions from a Traditional IRA are fully taxable for the year in which you receive the money. A major exception to this rule is that if you’ve previously made nondeductible contributions, you will receive the prorated amount of your nondeductible contribution tax-free (all earnings will be taxable).

Traditional IRA’s are subject to required minimum distributions starting at age 70 ½.

Roth IRA: Withdrawals from a Roth IRA are treated very differently from those of a Traditional IRA. If distributions are made after age 59 ½, there is no tax liability on Roth distributions as long as the account has been open for at least 5 years (calculated as tax years). This is because the contributions were already made with tax-free funds and the growth on the account is allowed tax-free.

In addition, as long as the account meets the 5-year rule there is also no tax owed if the distributions are due to total and permanent disability or death or for the purchase of a first home (subject to additional restrictions).

For other purposes, the contributions that you put into the account can be withdrawn tax and penalty-free.  This is a huge benefit that Roth IRA accounts offer. There is a specified order that Roth withdrawals are deemed to be made:

  1. Regular contributions
  2. Conversion and rollover contributions
  3. Earnings on contributions

This order is beneficial because earnings are taxed very last and avoiding the 10% penalty on early distributions of earnings requires special circumstances.

For example, assume that you have a Roth IRA valued at $60,000. You made contributions to that account of $25,000, converted $30,000 4 years ago and the remaining $5,000 is the earnings on the account over the years. If you wanted to make a withdrawal of up to $25,000 you could do so without paying taxes or penalties.

Required minimum distributions are not required for Roth IRA accounts, even after age 70 1/2.

More detailed rules, explanations, and worksheets are provided in the IRS’s Publication 590-B “Distributions from Individual Retirement Arrangements” (2016 is the latest edition available).


Employer-sponsored plans such as 401k accounts can be rolled over to IRA accounts when you separate from your employer. They can also be directly transferred from one brokerage company to another.

In addition to having more control over where your funds are located IRA accounts also allow you to invest in a much larger choice of mutual funds, stocks and other investments.

Currently, there is an opportunity for a one-time funding of your IRA to an HSA. I’ve gone into why I love HSA accounts in a previous class. The transfer of money from your Traditional or Roth IRA has to be made by the end of the calendar year and is limited to the applicable HSA contribution limits.

An example of how annual contributions of $5,500 to retirement accounts can grow is shown in the spreadsheet preview below. Assuming the maximum contributions allowed increase by $500 every 5 years (which is a very conservative estimate), using only IRA accounts you can grow your retirement savings to nearly $1 million over 35 years.

Contributing the maximum to an IRA every year will result in nearly a MILLION dollars for retirement if you start early. Awesome!


Deciding whether to contribute to a Traditional or a Roth IRA (if that option is available to you) can be a confusing decision.

A Roth IRA is generally better than a Traditional IRA if you have a combination of the following factors:

  • You are in a lower tax bracket now than you expect to be in your future retirement days
  • You have many years before retirement
  • You’ve maxed out your qualified employer-sponsored retirement plans and don’t meet the income requirements for deducting traditional IRA contributions (for 2017, this would be between $118,000-$196,000 in modified adjusted gross income)
  • You want to avoid required minimum distributions after age 70 1/2


The Smith family hasn’t been contributing to an IRA, but would qualify to contribute to either a deductible traditional IRA or a Roth IRA based on their modified adjusted gross income.

They determine that after they are able to contribute enough to their employer-sponsored plan to receive full employer matching, they will contribute to a Roth IRA. They have a lot of time before retirement for the account to grow and are in a low tax bracket now, so a Roth IRA may be a good choice for them.


Your homework assignment is to calculate how contributing to either a traditional or Roth IRA can help you meet your retirement needs.

  • IMPROVING -Use an online IRA calculator to determine the impact of contributing to an IRA account.
  • INVESTED – Use the spreadsheet to analyze how varying contributions will help you to reach your retirement goals as calculated in class RE401: Calculating Retirement Needs.
  • UNSTOPPABLE – Use the spreadsheet to analyze varying contributions as above and determine whether you should contribute to a Traditional or Roth IRA.

Are you using a Traditional or Roth IRA to fund your retirement?


5 Responses

  1. My wife and I both max out our Roth IRAs. I figure we should spread around our risk when it comes to taxes and max out my traditional 401k (my wife doesn’t have one) and then max out our Roth 401k. One of the things I’ve been thinking about though is if it makes sense to max out my Roth 401k moving forward if tax rates are cut. I may never been in that tax bracket again 🙂

    1. I have such mixed feelings about traditional vs. Roth as well. I truly have no idea where we’ll be at during retirement age. My husband loves his job and has the capability of getting some very significant pay increases that would for sure result in us being in a higher tax bracket then (not to mention who knows what will happen with the tax rates in the next 30 years!). On the other hand, I want to be optimistic that the stock market will have significant growth and I’ll enjoy those tax-free savings later. I’m sticking with a mix of traditional 401k and Roth IRA contributions.

  2. Big thing for people to know about IRAs is to use the tax-free status. If you have bonds or high dividend stocks and don’t need the money now, have them in your IRA or 401k and not your taxable accounts. Don’t pay taxes until you must. Likewise, hold single stocks you buy for growth in your taxable accounts so that you can sell the losers and get a write-off. These losses are just lost in an IRA.



I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.


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