Don't Fall Behind on Retirement Planning: How to Use Individual Retirement Accounts (IRAs) Like a Pro
In this episode of Money Rehab with Nicole Lapin, the host breaks down the fundamentals of Individual Retirement Accounts (IRAs) and explains the key differences between traditional and Roth options. Lapin explores how each type of IRA impacts your taxes both now and in retirement, and outlines the rules for contributions and withdrawals, including specific age-related requirements and limitations.
The discussion covers practical aspects of IRA management, from choosing between traditional and Roth accounts to understanding contribution limits and withdrawal regulations. Lapin provides guidance on opening and managing an IRA through a brokerage platform, detailing various investment options available to account holders and explaining features like contribution matching and portfolio customization.
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1-Page Summary
Types of IRAs (Traditional vs. Roth)
Understanding the differences between traditional and Roth IRAs is essential for retirement planning. Financial expert Lapin explains that traditional IRAs offer immediate tax benefits by allowing you to deduct contributions from your current taxable income, though withdrawals are taxed during retirement. In contrast, Roth IRA contributions are made with after-tax money, offering no immediate tax benefit, but allowing for tax-free growth and withdrawals during retirement.
Tax Implications of IRAs
The tax implications of IRAs vary significantly between traditional and Roth accounts. With traditional IRAs, contributions can reduce your current taxable income, potentially lowering your tax bill or moving you into a lower tax bracket. However, all withdrawals in retirement are taxed as ordinary income. Roth IRAs, as Lapin notes, offer more predictability: while contributions provide no immediate tax benefit, both investment growth and retirement withdrawals remain tax-free.
IRA Contribution and Withdrawal Rules
According to Lapin, as of 2025, the annual IRA contribution limit is set at $7,000, with an increased limit of $8,000 for those 50 and older. Traditional IRAs require minimum distributions starting at age 73, while Roth IRAs offer more flexibility. With Roth IRAs, contributions can be withdrawn anytime without penalties, though earnings withdrawn before age 59½ may face taxes and penalties.
Opening and Managing an IRA Account
Lapin recommends opening an IRA through a brokerage like Public, which offers both traditional and Roth options. Through Public, investors can access various investment assets, including stocks, ETFs, and bonds. The platform offers additional benefits, including a 1% match on rollovers, transfers, and annual contributions, along with the ability to set up recurring contributions to pre-made or personalized investment portfolios.
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Counterarguments
- Traditional IRAs might not be the best choice for individuals who expect to be in a higher tax bracket during retirement, as the tax rate on withdrawals could be higher than the rate at which they made their contributions.
- Roth IRAs require upfront payment of taxes, which could be a disadvantage for those who need immediate tax relief or who believe their tax rate is currently higher than it will be during retirement.
- The flexibility of Roth IRAs is beneficial, but it also requires more discipline to avoid early withdrawals that could undermine long-term retirement savings.
- The annual contribution limits for IRAs may not be sufficient for some individuals' retirement savings goals, necessitating additional investment vehicles.
- The benefits of opening an IRA through a brokerage like Public are contingent on the brokerage's continued performance and reliability, and there may be other brokerages with different benefits that could be more suitable for certain investors.
- The 1% match on rollovers, transfers, and contributions offered by Public is a nice incentive, but it's important to consider the underlying fees and investment options, as these could offset any benefits from such a match.
- The age at which traditional IRAs require minimum distributions (age 73) may not align with every individual's retirement plans or life expectancy, potentially leading to less optimal tax planning or estate planning outcomes.
- The tax-free growth of Roth IRAs assumes that the current tax laws will not change, but future legislative changes could potentially alter the tax benefits of Roth IRAs.
Actionables
- You can simulate future financial scenarios by using an online IRA calculator to compare the long-term impact of Traditional and Roth IRA contributions based on your current income, expected retirement age, and tax bracket. By inputting different variables, you'll see how the choice between a Traditional or Roth IRA affects your retirement savings, helping you make an informed decision that aligns with your financial goals.
- Create a personalized IRA contribution schedule that aligns with your cash flow patterns and financial goals. If you're leaning towards a Roth IRA for its flexibility, consider setting up bi-weekly or monthly automatic transfers from your checking account to your IRA immediately after payday. This habit ensures you're consistently contributing and taking advantage of dollar-cost averaging, which can help smooth out the volatility of the market over time.
- Engage in a yearly 'IRA strategy review' with a financial advisor or a trusted, financially savvy friend to discuss your retirement savings strategy. This annual check-in allows you to adjust your contributions based on life changes, such as a new job, a raise, or a change in marital status, ensuring that your IRA strategy remains optimized for your current situation and future financial goals.
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Types of IRAs (Traditional vs. Roth)
When planning for retirement, understanding the differences between traditional and Roth IRAs is crucial.
Traditional IRAs: Tax-deferred Contributions, Taxable Withdrawals
Traditional IRA: Contributions Reduce Taxable Income; Withdrawals Taxed in Retirement
A traditional IRA offers immediate tax benefits by allowing you to deduct contributions from your taxable income for the year. However, every dollar you withdraw during retirement is taxed as regular income. Lapin explains, "If you're in a higher tax bracket now, a traditional IRA can make sense. You get a tax deduction now when it matters most, and you pay lower taxes later."
Roth IRAs: Tax-free Growth and Retirement Withdrawals
Roth IRA Contributions Are After-Tax; Investments Grow and Withdraw Tax-free in Retirement
In contrast, Roth IRA contributions are made with after-tax money, which means they do ...
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Types of IRAs (Traditional vs. Roth)
Additional Materials
Counterarguments
- Traditional IRAs might not always provide a tax benefit if the individual is in a lower tax bracket at retirement, potentially negating the immediate tax deduction advantage.
- The assumption that one will be in a lower tax bracket during retirement is not guaranteed, as tax rates and personal circumstances can change.
- Roth IRAs require paying taxes upfront, which could be a disadvantage for those who need more immediate tax relief.
- The benefits of Roth IRAs are maximized only if the individual's tax rate during retirement is higher than during their working years, which is not always the case.
- The decision between a traditional and Roth IRA is not just about tax brackets but also about other factors such as estate planning, eligibility, and access to funds before retirement.
- The text does not consider the impact of required minimum distributions (RMDs) on traditional IRAs, which can force taxable withdrawals and potentially increase one's tax burden in retirement.
- The text does not address the potential for legislative changes that could affect the tax-free status of Roth IRA withdrawals in the future.
- The text does not menti ...
Actionables
- You can simulate future financial scenarios by using an online IRA comparison calculator to see the potential impact of choosing between a traditional and Roth IRA. Input your current age, income, tax bracket, and expected retirement age to compare how your contributions could grow in each type of account. This will help you visualize the long-term benefits or drawbacks based on your specific situation.
- Create a "tax diversification" investment strategy by opening both a traditional and a Roth IRA if you're eligible. Contribute to both accounts in the same year to hedge against uncertainty in future tax rates. This way, you'll have the flexibility to withdraw from the account that is most tax-advantageous at the time of retirement.
- Engage in annual income evaluations to decide on IRA contrib ...
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Tax Implications of IRAs (When Taxes Are Paid)
Understanding the tax implications of Individual Retirement Accounts (IRAs) is crucial for effective retirement planning. Each type of IRA—traditional and Roth—has distinct tax rules regarding when you pay taxes.
Traditional IRAs: Tax Benefits Now, Pay Taxes in Retirement
Traditional IRAs offer immediate tax benefits that can shave money off your current tax bill.
IRA Contributions Deductible; Retirement Withdrawals Taxed
When you contribute to a traditional IRA, these contributions may reduce your taxable income for the year, potentially lowering your current tax bill or moving you into a lower tax bracket. However, once you retire and begin taking required minimum distributions (RMDs), these withdrawals are taxed as ordinary income. Financial expert says, "a traditional IRA can make sense. You get a tax deduction now [...] and you pay lower taxes later."
Roth IRAs Offer Tax-free Growth and Withdrawals
Unlike traditional IRAs, Roth IRAs have different tax advantages that apply later in life.
Roth IRA Contributions: No Immediate Tax Benefit, but Tax-free Growth and Withdrawals in Retirement
Contributions to a ...
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Tax Implications of IRAs (When Taxes Are Paid)
Additional Materials
Counterarguments
- Traditional IRAs might not be beneficial for individuals who end up in a higher tax bracket in retirement, as the tax savings now could be outweighed by higher taxes later.
- The immediate tax deduction of traditional IRAs assumes that the taxpayer's marginal tax rate will be lower in retirement, which may not be the case for everyone.
- Roth IRAs require paying taxes upfront, which could be a disadvantage for those who need immediate tax relief or have limited cash flow.
- The benefit of tax-free withdrawals in Roth IRAs assumes that tax rates will not be lower in the future, which is uncertain.
- Roth IRAs might not be the best choice for individuals who expect to have a significantly lower income in retirement and therefore would benefit from the deferred tax structure of a traditional IRA.
- The decision between a traditional and Roth IRA also depends on factors other than tax brackets, such as estate plannin ...
Actionables
- You can simulate future tax scenarios using an online tax calculator to decide between a traditional or Roth IRA. By inputting your current income, deductions, and projected retirement income, you'll see how contributions to either IRA might affect your taxes now and in retirement. For example, if you expect your retirement income to be higher, the Roth IRA's tax-free withdrawals could be more beneficial.
- Create a "Retirement Tax Impact" spreadsheet to track and project your tax bracket over time. Start by logging your current taxable income and tax bracket, then estimate future income changes, such as salary increases or additional income streams. This will help you visualize the potential benefits of a traditional IRA's immediate tax deduction versus the Roth IRA's tax-free growth.
- Engage in annual retirement planning se ...
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IRA Contribution and Withdrawal Rules
Understanding IRA contribution and withdrawal rules is essential for retirement planning. Nicole Lapin, a financial expert, outlines the key regulations governing both traditional and Roth IRAs for the year 2025.
IRA Contribution Limits Split Between Traditional and Roth Accounts
IRA Contribution Limits for 2025
Lapin states that there are caps on how much you can contribute to IRAs. As of 2025, the annual contribution limit is set to $7,000, with a catch-up contribution limit of $8,000 for individuals 50 years or older.
Traditional IRAs Require Minimum Distributions at Age 73
IRA RMDs Begin at Age 73
Starting at age 73, as per the rules in 2025, you must begin taking required minimum distributions (RMDs) from traditional IRA accounts.
Roth IRAs Have More Flexible Withdrawal Rules
Roth IRA Contributions Withdrawable Anytime, Earnings Taxed and Penalized if Under 59 1/2
Roth IRAs offer more wit ...
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IRA Contribution and Withdrawal Rules
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Counterarguments
- The annual contribution limit of $7,000 may not keep pace with inflation, potentially diminishing the purchasing power of these contributions by the time of retirement.
- The catch-up contribution limit of $8,000 for individuals 50 or older may not be sufficient for those who started saving for retirement later in life.
- The age threshold of 73 for RMDs from traditional IRAs may not align with the changing landscape of retirement, where many individuals are working and living longer.
- While Roth IRA contributions can be withdrawn at any time without tax or penalty, this could encourage premature withdrawals that compromise long-term retirement savings.
- The penalties on early withdrawal of earnings from Roth IRAs may b ...
Actionables
- You can maximize your IRA contributions by setting up automatic monthly transfers to reach the $7,000 limit by the end of the year. By dividing $7,000 by 12, you can determine the monthly amount to transfer, ensuring you contribute the maximum allowed and potentially reduce the temptation to spend that money elsewhere.
- If you're approaching 50, start planning for catch-up contributions by adjusting your budget now. Review your current expenses and identify areas where you can cut back to free up additional funds. This way, when you turn 50, you'll be ready to increase your IRA contributions without it impacting your daily finances.
- Consider opening a Roth IRA to have fl ...
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Opening and Managing an IRA Account
Lapin discusses how to open and manage an Individual Retirement Account (IRA), focusing on the process of opening these accounts in a brokerage like Public and the various benefits of doing so.
Open IRAs at Brokerages Like Public
Public Offers Traditional and Roth IRAs, Letting Investors Choose Based On Their Tax Situation and Retirement Goals
Lapin states that investors can open an IRA in a brokerage account, naming Public as her favorite. On Public, both traditional and Roth IRAs are available, providing options for investors based on their tax situations and retirement goals. Public gives access to a wide range of investment assets such as thousands of stocks, Exchange-Traded Funds (ETFs), and bonds to align with individual investment styles and retirement aspirations.
IRA Accounts Must Be Invested, Not Just Funded
Open an IRA to Invest in Stocks, Bonds, or Funds For Retirement Savings Growth
Within an IRA account at Public, you can invest in a variety of asset classes including stocks, bonds, mutual funds, and ETFs of your choice. This flexibility allows for the growth of retirement savings, catering to different investing strategies and objectives.
IRA Rollovers and Transfers Can Earn Additional Incentives
Public Offers 1% Match on IRA Rol ...
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Opening and Managing an IRA Account
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Counterarguments
- While Public offers a 1% match on IRA rollovers, transfers, and contributions, it's important to compare this with other brokerages that might offer different incentives or lower fees, which could be more beneficial in the long run.
- The choice between a traditional and Roth IRA should be based on more than just current tax situations and retirement goals; it should also consider future tax implications and changes in tax laws.
- Access to a wide range of investment assets is beneficial, but the quality of investment options and the brokerage's execution capabilities are also critical factors to consider.
- The flexibility to invest in various asset classes is a positive feature, but investors must have the knowledge or advice to make informed decisions to ensure these investments align with their risk tolerance and retirement timeline.
- The 1% match is an attractive feature, but it's essential to understand any associated terms and conditions, such as vesting periods or limits on the match.
- The ability to schedule recurring contributions is convenient, but investors should be aware of the potenti ...
Actionables
- You can diversify your retirement portfolio by exploring alternative assets not mentioned, such as real estate investment trusts (REITs) or commodities, to potentially enhance your IRA's growth. By researching these additional asset classes and understanding their risk profiles, you can add them to your IRA to create a more robust investment strategy that goes beyond stocks, bonds, and ETFs.
- Consider setting up a 'challenge savings plan' where you match or exceed Public's 1% incentive with additional personal contributions. For example, if you receive a 1% match on a $100 contribution, challenge yourself to add another $10, effectively saving $111. This gamified approach can increase your retirement savings more rapidly and make the process more engaging.
- Use financial simulation tools to model the potentia ...
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