The picture above is from the Official IRS Website and obviously the IRS only covers US matters so this won’t apply to everyone. Also with the complexity of the tax code it is very important to read the full documentation yourself, or consult a professional CPA.

Previously, I touched on Individual Retirement Accounts (The IRS calls them Arrangements) in the Talk like an Investor article, but today I started to write about Spousal IRAs and realized I needed to step back. What is an IRA? Why are there so many types? And doesn’t my 401k do that already?

To get started what are these contraptions? Well, IRAs are a bucket that you put money into every year. They give you advantages on your taxes and they allow you to either invest the money into something, or leave it as cash. These buckets have annual limits to restrict your ability to avoid too many taxes.

IRAs have two primary types: Traditional and Roth. A Traditional IRA will usually be funded with pre-tax income dollars. A Roth is funded with post-tax income dollars. The key word here is income. You cannot fund an IRA without having earned income equal to or greater than your contribution. If you make $5,000 you can contribute $5,000 to your IRA that year, but not the cap of $7,000 (2025).

How does this relate to a 401k/403b/TSP(Thrift Savings Plan). Well those numbers are named after parts of the tax code and are considered Employer Sponsored Plans. These are functionally the same things. 401k is for for-profit businesses to offer to employees, 403b is for non-profit and local governments, and TSP is for the Federal Government.

If your income is high enough you can contribute to both your 401k and your IRA. That’s where some of the real power comes in, but we’ll cover that later. The focus here is just the IRAs.

So pre tax, and post tax; Traditional vs Roth. How much can you put into these funds? For 2025 the limit is $7,000 if under age 50 and $8,000 if age 50 +. In 2026, the limits are $7,500 and $8,600. The reason we need both of these numbers is because you can still contribute to your 2025 IRAs until April 15th of 2026 and reduce your tax burden from last year.

Now, depending on whether you are filing as Single, Married Filing Jointly, or Married Filing Separately there’s all sorts of rules and caveats based on your income and whether or not you have an employer plan like a 401k that can reduce how much you can deduct on your taxes from a tIRA contribution, or if you can no longer contribute to a roth at all. I’ll link the relevant IRS pages because…It’s a lot of caveats and outside the scope of this post.

https://www.irs.gov/retirement-plans/ira-deduction-limits

I understand that link has a lot of meat to chew through. For many people it won’t significantly affect them. To return to our basics IRAs shake out like this:

IRA	Taxes	Advantage
Traditional	Paid Later	More money in your pocket now, taxes paid on growth and contributions at withdrawal.
Roth	Paid Now	Contributions and Growth both stay tax free even when withdrawn.

For the most part, with a few exceptions, IRA money is locked up until age 59 1/2. Any withdrawals done before that age result in a penalty fee for taking the money out of the account. After Age 73, and age 75 (if born after 1960) you will be required to make Required Minimum Distributions (RMDs) from your retirement accounts.

Since we always try to get back to the math. For 2025 Traditional IRA deductions reduce above $125,000 (if you have an employer plan like a 401k). For Single filers you want under $79,000 to maximum the deduction. This is MAGI so your 401k contributions do count for lowering your qualifying income. 1

Filing Status	Full Deduction	Max Possible Tax Saving	Contribution Amount
Single	< $79,000 MAGI1	$1,540	$7,000
MFJ	< $126,000 MAGI	$1,540	$7,000
MFJ Both Spouses	< $126,000 MAGI	$3,080	$14,000

1. MAGI stands for Modified Adjusted Gross Income. Consult IRS Publication 590-A for the full phase-out schedules. ↩︎

For many people those numbers look off balance. If I don’t spend $7,000 on retirement and pay $1,540 in taxes then I have $5,460 extra money for something else. The tax savings are a bonus like finding that extra nugget in the box or the fries at the bottom of the bag. You want to put the money into your IRA because the earlier you do so the longer it will grow to take care of you in Retirement. $7,500 is $20 a day. I’ve known people who spend that eating out at lunch every day.

I can’t find a good chart, but my Uncle (the soup one) made $30,000 at the peak of his career, one time. His average income floated around $10k. This during the ’80s through the early 2000s. Someone at some point told him to cap his IRA. From 1981 to 2002 the IRA limit was at $2000. That’s pretty close to his working career. Best case scenario he contributed $42,000 to his IRA. When he died, with that IRA holding low efficiency, high fee, money markets that his bank picked for him. He was rocking $256,000 in that IRA in 2019. With dividend reinvestment and a low fee S&P 500 matching fund that same money in that same time would have been $895,000.

If you stop drinking Starbucks or Dunkin or some other $5/day cup of coffee and put that into your IRA you’ll have $1,825/y. Almost the 2k my Uncle did. In 40 years that could easily be at $1,000,000!

Stop waiting and start doing: Remember Robinhood Gold does a 3% match. And you get free stock with my referral link.

OK now I would like to cover other versions of IRAs that you might hear about, but these really need to be their own posts so lets just do a tiny blurb:

Spousal IRA: Trad or Roth uses Spouses income to fund both Spouses IRAs, low income or non-working spouses.
Child IRA: Same as Spousal, but child must have income equal to contribution up to limit. 10 year old works at family restaurant makes $7,000, parents can contribute $7,000 to IRA.
SEP IRA: Simplified Employee Pension plan it’s called an IRA but it’s much closer to a 401k.
SIMPLE IRA: Savings Incentive Match PLan for Employees an IRA that your employer can help contribute to.

Tangential to the above IRAs and in similar veins. Are 529 Education Savings Plans (usually only tax advantaged to state taxes), 529A ABLE Accounts (disabled individuals), 530 Coverdell ESA (like 529, but lower cap and more education adjacent things you can purchase), 530A Trump Account (effectively a Roth for Kids that doesn’t require them to have income); these are new 2025/26.

Well that was significantly longer than I intended, and has at least 8 more things that need covered. So much for a mini thought. I guess I have more things to write about now.

~~Miniwing~~
Stoic, Investor, Parent, Wordsmith