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5 min read Personal Finance

Your Future Self Called (Step 8: The IRA)

Want to save on taxes AND save for retirement at the same time? Let's chat about IRA's.
Your Future Self Called (Step 8: The IRA)
I've read the books, so you don't have to

You’ve Heard the Term, But Do You Actually Know What It Is?

Ah, yes. The IRA. Yet another TLA in the world of personal finance. We toss around these acronyms and just assume that people know what they mean, all the rules behind them, and how to use them to build wealth.

Today, we're going to walk through, in plain English, what an IRA is, the different account types, the rules surrounding them, and how to get started.

If this is your first time here and you like what you’re reading, check out the Base10 Basics page to catch up on where we are in this personal finance journey. We’re about halfway through!

For some quick context: we just paid off our Moderate Interest Debt in Step 7, and we’re really thinking long term now. We’re out of emergency mode and into strategically planning our future.

TLA: Three Letter Acronym
Isn't TLA a TLA itself?... 🤔

What Is an IRA, Anyway?

An Individual Retirement Account (IRA) is a benefit that the federal government set up in 1974 to help people with earned income save more money for retirement.

The Roth IRA didn't come along until 1994 when Delaware Senator William V. Roth, Jr. helped establish it.

IRA's are different from a 401(k) or TSP, which we touched on in Step 4: The Employer Match, and will cover more thoroughly in a later step, but the Roth and Traditional tax treatments are the same for both. An IRA gives us more direct control over our retirement investments than a typical 401(k) or TSP, and, unlike those employer-tied accounts, an IRA follows us throughout our career, no matter where we work.

It’s also different from just opening a regular investment brokerage account. Because the government provides such a great tax-saving benefit, IRAs come with extra rules and limits that standard investment accounts don’t have.

📌 We’ll take a deep dive to directly compare 401(k)/TSP, IRA, and regular brokerages in a later post.

An IRA isn’t an investment itself. Think of it as a special "bucket." When we put money into it, and follow the government’s rules, we get rewarded with a more stable and enjoyable retirement.

Why Would I Use One?

IRAs allow us to avoid one of two taxable events when we invest. Normally, with a regular brokerage account, we’re taxed when we earn money (federal income tax) and again on any investment gains when we sell (capital gains tax). Avoiding even one of those taxes means more money in our pockets when we need it in retirement.

Most earners fall in or around the 22% tax bracket, so the government is effectively letting us keep $22 for every $100 that we invest in an IRA. That’s a huge benefit. And that 22% savings helps accelerate growth, allowing us to save even more over time.

Roth vs. Traditional – What’s the Difference? Is One Better?

Remember how IRAs let us skip one of the two taxable events? This is where the Roth vs. Traditional split comes in:
We get to avoid one or the other—but not both. Uncle Sam still wants a piece of the pie.

  • Traditional IRA:
     ✔️ Not taxed when we earn the money
     ❌ Taxed on all distributions
  • Roth IRA:
     ❌ Taxed when we earn the money
     ✔️ Not taxed on any distributions
  • Regular Brokerage (for comparison):
     ❌ Taxed when you earn the money
     ❌ Taxed on all distributions
📌 We’ll explain these taxes more clearly in the deep dive mentioned earlier.

When it comes to choosing between Roth and Traditional, at this point it really doesn’t matter much. Just contributing to either (or both, 50/50) gets you 95% of the value.

There are a lot of unpredictable future factors, such as your tax bracket at retirement, income changes, and tax future policy changes, that can tilt the scale. Personally, I contribute to both, split down the middle. Because when we retire, we can choose which account to withdraw from, giving us flexibility in tax planning.

The real win here? Just contributing. Reap the full value of the tax-advantaged account.

Pro tip: If your expenses are low and you’re sitting on extra cash, Roth is a great way to go.

Am I Even Allowed to Open One?

More than likely, yes! You can contribute to an IRA as long as you have earned income.

Feel free to read through the IRS details if you’re in need of a nap. For now, here’s the short version:

Qualifies as earned income:

  • Wages
  • Salaries
  • Commissions
  • Tips
  • Bonuses
  • Net income from self-employment

Does not qualify:

  • Rental income
  • Interest and dividends
  • Pension or annuity income

Basically, if you worked for it and got paid, it counts.

What’s the Catch?

So far we’ve only talked about the good stuff. Time for the fine print.

Because the government gives us tax perks with these accounts, they set boundaries on how much we can contribute now and how we take money out later.

Contribution Rules (2025):

  • $7,000 max total across Roth and Traditional IRAs
  • If you're 50 or older, you can contribute up to $8,000
  • We could split the $7,000 any way (e.g., $5,000 Roth, $2,000 Traditional)
  • This limit is separate from our 401(k)/TSP contributions
  • Limits adjust yearly with inflation—check before contributing

Income Limits for Roth Contributions:

  • $150,000 Modified Adjusted Gross Income (MAGI) for single filers
  • $236,000 MAGI for married filers
  • Traditional IRAs have no income limit for contributions
📌 If you're near these limits, do a little more research or talk to a tax/financial advisor. Contributions over the income limit can trigger IRS penalties.

Early Withdrawals:

  • Before age 59½, any portion withdrawn that hasn't been taxed yet, is taxed as income plus a 10% penalty
  • Traditional = Entire account hasn't been taxed (contributions + gains), so an early withdrawal would trigger income tax and the 10% penalty on everything we take out.
  • Roth = Only gains haven't been taxed, since our contributions were post-tax, so an early withdrawal would trigger income tax and the 10% penalty only on the gains that we take out

Required Minimum Distributions (RMDs):

  • Traditional IRAs require RMDs starting at age 73 (75 in 2033)
  • Roth IRAs don’t have RMDs during your lifetime
  • The RMD amount is calculated annually based on our balance and age
  • The IRS basically wants to ensure they get their cut before we die

Okay, But Where Do I Even Start?

Nearly all major investment companies offer IRAs. If you're already using a company, stick with them—it makes account transfers easier. But if you're looking for options, here are two you can't go wrong with:

📌 I’ll be creating a more detailed recommendation page soon, covering tools for investing, budgeting, and more.

Things We Didn’t Even Cover

There are many more IRA nuances than we’ve gone into here. But this is more than enough to keep us moving on the Base10 Basics path. Here's just a sample of what we didn't get to:

  • Penalty-Free Withdrawals: Up to $10,000 for a first-time home purchase
  • Backdoor Roths: Even high earners can contribute with this workaround
  • Alternative Investments: We can buy real estate inside an IRA
  • Beneficiary Rules: Our IRA doesn’t disappear when we die
📌 We’ll cover these in a more advanced IRA post later.

A Step Toward Your Future Self

This is the first step that truly has us thinking long-term. If you're early in your career, this money could sit and grow for 30, 40, even 50+ years.

Some years will be harder to hit the limit than others. But your future self will thank you for starting. Every dollar you contribute now is a vote for the life you want later. Let the compound interest work its quiet magic.

Next up: Step 9: The Investments in Self