Introduction
Individual Retirement Accounts (IRAs) provide a flexible, tax-efficient way to save for your future. While often overlooked, understanding how IRAs work—and how they differ from employer-sponsored plans—can have a major impact on your FIRE timeline.
In this post, we'll walk through what an IRA is, its tax benefits, and why it fits into your MoneyOnFire (MOF) plan.
What Is an Individual Retirement Account (IRA)?
An IRA is a retirement savings account you open on your own—outside of a workplace plan like a 401(k). Anyone with earned income can contribute to an IRA. There are multiple types, with the most common being:
- Traditional IRA: Contributions may be tax-deductible. Taxes are paid later when you withdraw the money in retirement.
- Roth IRA: Contributions are made with after-tax dollars. Withdrawals (including growth) are tax-free in retirement.
Key Tax Advantages of an IRA
Tax-deductible Contributions (Traditional IRA)
Contributions to a Traditional IRA may reduce your taxable income in the year they are made—resulting in a lower tax bill today.
Tax-deferred Growth
Investments grow tax-free inside an IRA. You won't pay taxes on dividends or capital gains until you make withdrawals—allowing compound growth to work more efficiently.
Lower Taxes in Retirement
Since IRA withdrawals are taxed as ordinary income, and most people are in a lower bracket after retiring, you may pay less tax on those funds later.
Why Include an IRA in Your FIRE Plan?
- Flexibility & Control: Choose your own investments, manage risk, and design a portfolio that aligns with your FIRE timeline.
- Extra Retirement Savings: IRAs let you contribute beyond what's allowed in a 401(k), giving you more tax-advantaged space to grow wealth.
- Low Barriers to Entry: With lower contribution minimums, IRAs are accessible to nearly every investor—even beginners just starting out.
Conclusion
Whether you're maxing out your 401(k) or just starting your savings journey, an IRA can complement your plan and accelerate your path to FIRE. With smart planning and the right investments, this simple account can help you build a more secure, tax-efficient future.