DIY planning for retirement with IRAs

Knowing how these savings plans work is key to building a solid financial base for later years.


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Planning for retirement is essential for almost everyone, and, for the most part, people either do it through employer-sponsored programs or their own savings plan. And one of the mainstays of the do-it-yourself plans is the individual retirement account (IRA).

But people often have questions about IRAs. As an advanced financial planner, I’ve encountered retirement-account related questions ranging from understanding the difference between an IRA and other retirement accounts — like a pension — to whether to use a Roth conversion prior to retirement.

Understanding the basics of IRAs is the first step to resolving these and more questions. So, let’s look at where IRAs stand among retirement planning options and some of the advantages and risks associated with this retirement workhorse.

The IRA versus other types of retirement accounts

Traditional IRA basics: For those interested in reading the tax code itself, the Internal Revenue Code provides for IRAs under Section 408. Believe it or not, the IRS provides a definition of IRAs in relatively plain English:

An individual retirement arrangement (IRA) is a tax-favored personal savings arrangement, which allows you to set aside money for retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution.”

An IRA is a type of defined contribution plan, meaning the owner decides how much to contribute, and contributions are subject to annual limits. The balance grows over time, through contributions and investment earnings. At retirement, the assets in the account are available to provide the account owner a source of income.

A traditional IRA is a tax-deferred retirement savings arrangement. Typically, contributions are tax deductible for the year the contribution is made (subject to income limitations), and earnings from interest, dividends, and capital gains are able to grow inside the account on a tax-deferred basis. When the owner’s original contributions and investment earnings are withdrawn during retirement, the distributions are taxed as regular income.

Roth IRAs: In addition to the traditional IRA, the Internal Revenue Code also allows savers to establish Roth IRAs. Contributions to Roth IRAs are not tax deductible. For the Roth IRA owner, earnings that grow inside the Roth are tax free. Subject to certain qualifications, qualified distributions, and/or distributions that are a return of contributions, aren’t subject to tax.

Traditional IRAs are advantageous for individuals who expect their taxable income will be reduced during retirement and, therefore, subject to a lower marginal tax rate during retirement than during their working years. Roth IRAs provide tax-free income during retirement, but the owner has no current income tax deduction available.

Employer plans: The 401(k) is an example of an employer-sponsored, tax-deferred, defined contribution plan. There are also IRAs that are, by statute, designed for self-employed individuals: the SEP IRA and SIMPLE IRA.

In contrast to the defined contribution plans discussed here, defined benefit plans through an employer — such as pensions — often depend on an employee’s earnings and length of service. Such plans typically deliver regular payments during retirement.

IRA contribution limits

The Internal Revenue Code places limitations on contributions to traditional IRAs and Roth IRAs. Specifically, there are limits on the annual amounts that may be contributed as well as income caps above which retirement savers may not make tax-advantaged contributions.

2023 IRA Contribution Limits

For 2023, the total contributions an individual may make to all traditional and Roth IRAs cannot be more than:

  • $6,500, or $7,500 if age 50 or older.
  • The amount of taxable compensation earned for the year if less than the contribution limit.

Traditional IRA contributions may be tax deductible however, the deduction may be limited if the account owner or their spouse is covered by a plan at work OR income exceeds certain levels. The IRS provides a table.

Roth IRA contributions are not deductible; however, one’s ability to contribute may be limited by filing status and income. For example, an account owner who is married, filing jointly and has modified adjusted gross Income (MAGI) less than $218,000, may contribute up to the limit. The IRS provides a table for this as well.

Nondeductible contributions

While the tax code allows an income tax deduction for traditional IRA contributions up to the MAGI limits discussed above, there is no income cap on contributions to an IRA. Some retirement savers may find it beneficial to make nondeductible IRA contributions.

Benefits include:

  1. Future growth in the IRA is tax deferred.
  2. If the account owner keeps track of deductible and nondeductible contributions correctly, the nondeductible (after-tax) contributions become the client’s basis, and a portion of future distributions will likely be tax free.


With these basics in mind, you can see how traditional IRAs and Roth IRAs can be useful options in planning for retirement. And there are certain conversion and so-called backdoor tactics that can be employed, which make IRAs even more versatile.

Additionally, IRAs can be used in conjunction with other plans to help achieve particular financial goals.

Of course, choosing a retirement account type, deciding when to contribute, and planning for tax treatment is an individual decision. That’s why I would recommend working with your tax and financial professionals to determine which type best fits your unique needs.

The information provided is not written or intended as specific tax or legal advice. Fortis Lux Financial, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Provided by Fortis Lux Financial, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual). ©2023 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001