No 401(k) at Work? Why You Might Want to Consider an IRA

Once you get an IRA up and running, you’ll want to contribute on a regular basis if you can. Making contributions consistently is a key to building financial security, and the sooner you’re able to start, the better. That’s because the power of compounding could help grow your retirement savings the longer you can stay invested.

Contributing to an IRA doesn’t have to be something you have to remember to do regularly on your own. Many accounts have an automatic contributions feature that allows you to set up recurring deposits from your checking account.

For instance, some people choose to have their automatic deposits occur on payday—that way, a portion of their pay goes straight into their retirement funds without having to lift a finger. 

Good to know: Like other types of retirement accounts, IRAs are subject to annual contribution limits set by the IRS. You can find information for the 2026 tax year at IRS.gov.

Potential tax benefits of an IRA

Traditional and Roth IRAs are often referred to as “tax-advantaged” accounts. This simply means that they offer certain tax advantages that could help your savings to potentially grow tax-deferred or tax-free over time. 

Traditional IRA. With a traditional IRA, your retirement money can potentially grow tax-deferred. In other words, you won’t have to pay taxes on it until you take out the money in retirement.

You may be wondering what’s so great about being able to defer taxes. The thinking goes like this: Many retirees may find themselves in a lower tax bracket because they’re not working anymore. When they need to take out money in retirement, the idea is that the withdrawals may be taxed at a lower rate.

The other potential tax benefit is that your contributions might be tax-deductible when you file your taxes. Visit this IRS webpage for more information.

Roth IRA. Unlike a traditional IRA, Roth IRA contributions are not deductible, but you won’t have to pay taxes on your withdrawals in retirement as long as certain conditions are met. That’s because with a Roth IRA, you contribute money that you’ve already paid taxes on (“after-tax dollars”).

Keep in mind, however, that not everyone can open a Roth account, and you’re eligible to contribute only if your income is below certain levels. For more information, see "phase-out ranges and limitations" at IRS.gov. You can also visit the IRS's webpage on Roth IRAs for more details.

From a tax perspective, is one account better than the other?

Everyone’s financial and tax situations are different, but here’s what to keep in mind as you consider your options: 

• With traditional IRAs, your contributions may be tax-deductible in the year that you make them, and your retirement money could grow tax-deferred, meaning you don’t have to pay taxes on it until you make withdrawals in retirement.
• With Roth IRAs, while contributions are not tax deductible, your retirement money could grow tax-free, meaning tax-free withdrawals in retirement once certain conditions are met.

If you need help deciding between the two, consider working with a financial advisor to determine which option may work best for you and your goals. It is also possible to open both a traditional and Roth IRA (if you’re eligible) to help you put money away for retirement.  

Read more: Traditional vs. Roth IRA

Generally speaking, if you withdraw the funds before age 59½ (which is considered an “early withdrawal”), you may be subject to a 10% penalty in addition to any taxes you may owe on the withdrawal. However, exceptions may apply.

For instance, certain withdrawals, known as “qualified distributions,” from Roth IRAs could be tax- and penalty-free if you meet specific conditions. For example, if you’ve had the Roth account for at least five years, a withdrawal is considered to be a qualified distribution if you meet one of the following conditions: 

• You’re age 59½ or older.
• You’re totally and permanently disabled. 
• You use the funds to make a qualified first-time home purchase (up to $10,000 lifetime limit). 
• The funds are distributed to your beneficiary or estate as a result of your death.

For more details on Roth IRA distribution rules, see IRS Publication 590-B.

When it comes to traditional IRAs, you may be able to avoid the 10% early withdrawal penalty if you’re in one of the following situations:

• You are totally and permanently disabled.
• You are terminally ill.
• You are the beneficiary of a deceased IRA owner.
• You use the distributions to buy, build, or rebuild a first home.
• The distribution is for your qualified higher education expenses.

For the full list of exceptions and more information on traditional IRA withdrawal rules, see the IRS Publication 590-B. You may also want to consult a professional tax advisor to understand what rules may be applicable for your particular situation.

Opening an IRA in addition to a 401(k)

If you do have a 401(k) plan through work, you may still want to consider opening an IRA to help further boost your retirement savings.

For example, adding an IRA could be a smart option if:

• You often find yourself maxing out your 401(k) plan at work each year and want to put more money toward retirement.
• You want a retirement plan with potentially lower fees and more investment options. Generally speaking, IRAs typically have a wider variety of investment options and lower fees compared to 401(k) plans.

Saving for retirement is a long game, and there’s no one-size-fits-all strategy. How you contribute and which accounts you use will depend on your retirement goals and financial situation. If you have questions, consult a financial advisor who can help you put together a personalized plan.