Roth 401(k) or Traditional 401(k)

What’s An IRA?

If you’re thinking about your retirement or beginning to save for it, consider switching from a regular savings account to an Individual Retirement Account, also known as an IRA.

What exactly is an IRA? An IRA is an investment account made for building a savings for retirement. There are many types of IRAs such as traditional IRAs, Roth IRAs, SEP IRAs, and each can offer various tax benefits as a “reward” for saving. Keep in mind, to be eligible for an IRA, you need to have earned income.

How does an IRA work? Let’s review the two most popular types of IRAs, the traditional and the Roth IRA. Both IRAs allow a person to save $6,000 per year ($7,000 if you’re over 50 years old), even if you are already contributing to a 401(k) or another workplace savings plan.

With traditional IRAs, contributions are tax-deductible up to IRS limits and a person will not owe income taxes until you take out the funds. Your contributions are not tax-deductible, but your investments do grow tax-free and you can withdraw money tax-free in retirement from a Roth IRA.

Most banks and brokers offer traditional and Roth IRA accounts, but the types of investments you can have access to will vary depending on the provider. For example, with a bank, you can find certificates of deposit, and, with a broker, you will be able to invest in stocks and bonds. In general, stocks and bonds have higher returns.

Traditional IRA

  • You can usually deduct the amount of your contribution on your tax return.
  • Your money grows tax-deferred
  • You can contribute to this type of IRA regardless of the amount of income.
  • You need to be 59 ½ years old or meet some specific requirements to withdraw from this account to avoid a penalty.

Roth IRA

  • Contributions are not tax-deductible, your earnings are tax-free.
  • Withdrawals on earnings are tax-free after a 5-year holding period
  • You can withdraw money tax-free in retirement.
  • You can take out the money you contributed to a Roth IRA at any time without penalty.
  • There are income limits that prevent higher earners from contributing to Roths.

Backdoor Roth IRA

  • This is a tax strategy if your income placed you out of making Roth IRA contributions.
  • You open a traditional IRA and convert it to a Roth.

Spousal IRA

  • These accounts let spouses who don’t work contribute to either a traditional IRA or a Roth IRA based on his/her working spouse’s income.
  • This account is owned by the non-working spouse and the maximum contribution is $6,000 ($7,000 if 50 years old or older).

Self-Directed IRA

  • This is an IRA that allows you to invest in alternative investments such as real estate or a privately held company.


  • SEP (Simplified Employee Pension) IRAs cater to small-business owners and self-employed people. This type of IRA offers a tax deduction on contributions, the savings grow tax-deferred and withdrawals in retirement are taxed at regular income rates. The maximum contribution is $56,000 in 2019; however, you cannot contribute more than 25% of your compensation and if you have eligible employees, the IRS requires you to contribute to their accounts at the same rate that you contribute to your account.


  • This is an IRA geared toward small companies with 100 or fewer employees. It is compared to a 401(k) and it’s easy for employers to set up. SIMPLE stands for Savings Incentive Match Plan for Employees. Employees can contribute their own money up to $13,000 a year plus an extra $3,000 per year for people 50 years old and older.

Inherited IRAs

  • This IRA is also known as a beneficiary IRA comes with specific rules that vary depending on your relationship with the deceased person.

At Montoya Financial Strategies, we’ll help you get control of your financial future. The above information is just a brief overview of what different IRAs can do for you. All the information can be a bit overwhelming and a lot to remember. When you meet with one of our financial advisors, we will find an IRA suitable for your needs and explain all the requirements and rules to you.

Looking for a Financial Planning Advisor?

A financial planner will not recommend an IRA until they understand your goals and after discuss a long-term financial plan with you. Our team at Montoya will help you organize all your financial information into an easy-to-understand format. We will help you establish clear and realistic goals for success. We will listen to all your needs and find the best account for you. Montoya Financial Strategies has more than 30 years of experience helping clients plan their financial futures! Get started with us today! Click our financial planning page to learn more or call us at 800-965-5554.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

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