If you’re looking for ways to strengthen your long-term financial plan, an individual retirement account (IRA) can be a valuable addition. Depending on the type, an IRA may offer some distinct tax benefits, such as tax-deductible contributions or access to emergency funds for unplanned medical expenses.
While IRAs aren’t a one-size-fits-all solution, most financial advisors agree they deserve a spot in your retirement plan. Here’s more about the pros and cons of individual retirement accounts so you can decide how an IRA might fit into your plan.
What Is an IRA?
Also known as “individual retirement arrangements” by the IRS, an IRA is basically your own personal retirement toolbox that comes with potential tax perks when used strategically. Unlike a standard savings account or an employer-provided 401(k), this supplemental plan lets your money grow tax-deferred or tax-free, depending on the type of IRA you select.
- Traditional IRAs give you upfront tax deductions, subject to income limits. During retirement, the IRS taxes any withdrawals as ordinary income.
- Roth IRAs don’t give you that upfront tax break, but they allow tax-free withdrawals so long as you’ve had the account open for five years and you—the account owner—are 59.5 years of age or older.
- SIMPLE IRAs, or savings incentive match plan for employees, allow small business owners with 100 or fewer employees to set aside retirement account funds for employees, so long as they don’t have any other type of retirement plan. SIMPLE plans have higher contribution limits than traditional IRAs and mandatory employer contributions.1
- SEP IRAs, or simplified employee pension plans, allow employers of any size business to contribute up to 25% of an employee’s pay to traditional IRAs set up by the business. These plans are built for self-employed individuals and high-earning business owners who want to make larger tax-deductible contributions, up to $72,000.2,3
In other words, when you open an IRA, you’re not just stashing cash in a savings account. You’re strategically investing for your future while keeping more of your earnings that would normally go to taxes. There are contribution limits and withdrawal rules you’ll have to follow, but the structure of an IRA is what makes it a powerful way to build long-term wealth.
The Pros of Individual Retirement Accounts
Like any financial strategy, there are pros and cons to individual retirement accounts. Here are some of the advantages of IRAs.
Higher Contribution Potential for Business Owners
SIMPLE and SEP IRAs allow contributions well beyond the standard Roth or traditional IRA limits. Here are the varying contribution limits and requirements:
- SEP IRAs: Employers can contribute up to 25% of an employee’s compensation or up to $72,000 annually; employees cannot make their own contributions.
- SIMPLE IRAs: Employees can opt for salary reduction contributions and matching or non-elective employer contributions. Employee contributions can’t exceed $17,000 annually; those over 50 can contribute no more than $21,000 each year.4
- Roth and traditional IRAs: Contributions can’t exceed $7,500, or $8,600 if you’re 50-plus. You can’t contribute more than you’ve earned for either plan, and strict adjusted gross income-based eligibility rules apply, particularly for traditional IRAs.5
Tax Benefits
Whether you’ve rolled over an old 401(k) to a Roth IRA or you’re setting up a SIMPLE or SEP plan for your small business, you’ll find tax advantages with each.
- SIMPLE and SEP: Tax-deductible employee and employer contributions, which lower taxable income.
- Roth: Pay taxes at the outset and enjoy tax-free growth and withdrawals later.
Supplemental Savings
If you don’t have a workplace retirement plan, an IRA can be a good strategy to save for retirement. And even if you do have an employer-provided 401(k) account, you can potentially use an IRA as another way to increase your retirement savings.
Converting a 401(k) to an IRA
Converting a 401(k) into an IRA can consolidate accounts and expand investment choices. If you’re a high earner or a business owner, this gives you the chance to reposition assets into a Roth, SEP, or SIMPLE IRA for potentially better long-term tax efficiency.
According to recent research, households that have converted 401(k) assets tend to have higher balances than those who fund their IRAs with only individual contributions. In 2023 alone, the IRA holders who converted contributions had an average of $150,000 in their account, compared to $55,000 median balances for those who made their own contributions.6
More Investment Flexibility
Your 401(k) plan may provide you with an adequate amount of investing options, but they’re usually limited by your employer. IRAs tend to provide more flexibility in terms of the exchange-traded funds (ETFs), mutual funds, stocks and bonds, and any other investments the company running your IRA offers.
The Cons of Individual Retirement Accounts
Unlike other types of investments, IRAs come with strict rules, penalties, and contribution limits that can make accessing your money before retirement costly and complicated.
Income Requirements and Contribution Limits
Both Roth and traditional IRAs have income phaseouts that limit eligibility for high earners. SIMPLE and SEP IRAs allow larger contributions, but they come with employer requirements and more administrative rules. SEP plans, for instance, don’t allow catch-up contributions or elective salary deferrals.7
Required Minimum Distributions (RMDs) for Certain Plans
Once you reach a certain age (73 in 2026), you’ll have to begin withdrawing a minimum amount each year from traditional, SIMPLE, and SEP IRAs. And if you miss the deadline or withdraw too little, you will have to pay extra tax on withdrawals, up to 25%.8 Your RMD will depend on account balances, your life expectancy, and other potential factors such as spousal status. RMDs are not required for Roths during the owner’s lifetime.
Early Withdrawal Penalties
Pulling funds before age 59.5 generally triggers a 10% penalty, with limited exceptions. Roth IRAs offer more flexibility for contributions and withdrawals (not earnings), but SIMPLE and SEP withdrawals can be even more restrictive in the first two years. Check with your financial advisor before making any withdrawals.
Comparing IRAs to Other Retirement Accounts
| Feature | IRA | 401(k) |
|---|---|---|
| Contribution Limits (2026) | Roth/Traditional: $7,500 ($8,600 if 50+) SIMPLE: $17,000 ($21,000 if 50+) SEP: 25% compensation, up to $72,000 | $24,500 ($32,500 if 50+) |
| Tax Treatment | Roth: After-tax SIMPLE/SEP: Pre-tax Traditional: Pre-tax (with limits) | Traditional: Pre-tax Roth 401(k): After-tax |
| Employer Match | SIMPLE: Required SEP: Employer only Traditional/Roth: None | Yes, if offered |
| Investment Options | Wide (stocks, bonds, funds) | Often limited to plan menu |
| RMDs | Roth: None SIMPLE/SEP/Traditional: Yes, at 73 | Roth 401(k) and Traditional: Yes, at 73 |
Choosing the Right Retirement Accounts for Your Goals
For high net worth individuals and business owners, Roth, SIMPLE, and SEP IRAs are often the most relevant tools for balancing tax efficiency, contribution limits, and investment flexibility. Traditional IRAs remain an option, but are usually less favorable once income thresholds—IRS-set limits based on your modified adjusted gross income—reduce their tax advantages.
Retirement planning often requires a blend of strategies: First, contribute enough to capture available matches in a 401(k), and then fund an IRA as your budget and IRS limits allow. Ready to take the next step toward smarter retirement planning? Find an advisor.
FAQs
Should I open an IRA?
Opening an IRA makes sense if you don’t have access to a workplace plan or you want supplementary savings and tax advantages.
Should I contribute to an IRA if I already have a 401(k)?
Yes, you can invest in a 401(k) and an IRA, especially if you’ve already achieved maximum employer matching of your 401(k). IRAs provide investment flexibility and can offer either upfront tax deductions or tax-free withdrawals, depending on the type you choose.
Can I invest in an IRA if I am retired?
Yes, as long as you or your spouse has an earned income, whether from self-employment wages or workplace earnings.
Is an IRA worth it for retirement planning?
For most, an IRA is a worthwhile addition to retirement planning thanks to tax deferral, flexibility, and supplemental savings opportunities. However, contribution limits are lower than those of workplace plans, so combining both accounts can offer you the fullest benefit.
Are IRAs safe investments?
IRAs are generally considered safe if managed correctly. Their safety depends on the assets chosen inside the IRA; diversifying across bonds, funds, and stocks typically lowers risk. Like any investment, they’re subject to market fluctuations.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Wealth Services LLC nor any of its representatives may give legal or tax advice.
Limitations and Early Withdrawals: Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Retirement Plans: Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
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1 “SIMPLE IRA plan,” Internal Revenue Service, last reviewed August 26, 2025, https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan.
2 “Simplified Employee Pension plan (SEP),” Internal Revenue Service, last reviewed August 26, 2025, https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep.
3 Internal Revenue Service. (2025, August 26). COLA increases for dollar limitations on benefits and contributions. U.S. Department of the Treasury. Retrieved from https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions
4 “Retirement topics – SIMPLE IRA contribution limits,” Internal Revenue Service, last reviewed August 26, 2025, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits.
5 “Retirement topics – IRA contribution limits,” Internal Revenue Service, last reviewed August 26, 2025, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.
6 Investment Company Institute, Ten Important Facts About IRAs (Washington, DC: Investment Company Institute, July 2024), https://www.ici.org/system/files/2022-07/ten-facts-iras.pdf.
7 “SEP Contribution Limits (Including Grandfathered SARSEPs),” Internal Revenue Service, last reviewed February 27, 2025, https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps.
8 “Retirement plan and IRA required minimum distributions FAQs,” Internal Revenue Service, last reviewed August 26, 2025, https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs.
