IRAs simplified
An at-a-glance guide to individual retirement accounts
What is an IRA?
Simply put, an IRA is an investment account that you can use to save for retirement.
How does an IRA work?
Think of an IRA as a bucket. You choose how you want to fill that bucket. You can fill it with investments like stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more.
When investments are in this bucket, they offer tax advantages that regular investments don’t offer.
Why is an IRA beneficial?
People use IRAs to invest for retirement because of the tax advantages and the value of compounding.
Tax advantages of IRAs
An IRA has tax advantages that don’t apply to other types of investment accounts.
Tax advantages are based on the type of IRA you choose:
How compounding works
The money you invest is compounded year over year, helping it grow over time.
Compounding can create a snowball effect, as interest earned is reinvested and can make more money.
How does an IRA differ from a 401(k)?
401(k)s and IRAs are two ways to invest for retirement. It’s not uncommon to have both to maximize the benefits of each while saving for retirement.
Set up
401(k): Usually part of an employer’s benefits package, where they have an agreement with an investment broker to offer investments.
IRA: You set it up yourself through the bank or an investment broker, like U.S. Bancorp Investments.
An IRA is also a common option for those whose employers don’t offer a 401(k) option: those who are self-employed, own their own business or are part of the gig economy.
Investment options
401(k): An employer-sponsored 401(k) plan usually has limited investment options, and many times your portfolio is added to a general target-date fund.
IRA: You can choose any mix of investments to include in your IRA. You can make these decisions yourself or use a guided investment solution to fill your bucket.
Additional contributions
Whether you invest enough in a 401(k) to receive the company match or you max it out, an IRA is a way to add even more toward your retirement.
You can complement a 401(k) with an IRA if you stay below the investment limits.
Said another way, you can max out both for a total of $26,500 ($34,000 if age 50+) per year.
How do you open an IRA?
Automated investing
Offered exclusively by U.S. Bancorp Investments
Managed for you
Effort: Low
An online investment portfolio is built for you based on your preferences. Your account is monitored and adjusted as the market fluctuates.
Works well if… you are starting out and want a diversified mix of investments selected and managed for you.
Self-directed
Offered exclusively by U.S. Bancorp Investments
Manage your own
Effort: High
Complete freedom for the hands-on investor. Buy and sell specific investments online.
Works well if… you are confident in making your own investment decisions.
Financial professional
Effort: Varies
Work with a professional to create your financial plan.
Works well if… you have more sophisticated or complex financial needs or prefer personal guidance.
IRA tips
Why does April 18—Tax Day—matter?
Last year’s taxes
If you open an IRA before April 18, you can deduct your contribution on the filing year’s taxes. This can reduce your taxable income for that year.*
Contribution limit
The amount of money that you contribute to an IRA before April 18 counts toward the prior year’s limit. For new IRAs, it is kind of like a jumpstart, since you could basically contribute $6,000 before April 18 and have the whole next year to count toward that year’s limit.
What’s the difference between a Roth IRA and a Traditional IRA?
The biggest difference is the tax advantage. There are also differences related to withdrawals and required distributions.
Roth IRA
Tax implications: “Tax-free.” When you withdraw money after retirement, you are not taxed on it.
Traditional
Tax implications: “Tax-deferred.” You can receive a tax deduction on the money you place in the account. When you withdraw the money in retirement, it will be taxed as ordinary income at that time.
Investment and insurance products and services including annuities are:
Not a deposit ● Not FDIC insured ● May lose value ● Not bank guaranteed ● Not insured by any federal government agency
*Your deduction may be reduced or eliminated based on income.
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