Disclaimer: This article is for general illustrative purposes and/or informational purposes only. It is not meant to serve as investment advice.
What Is an IRA?
An IRA, short for “individual retirement account,” is a type of retirement savings account that lets you make contributions today towards a retirement fund. Depending on their type, an IRA provides various tax benefits for your investments.
There are various kinds of IRAs, each of them with unique advantages for savers. Here are some of the most common types:
- Traditional IRA
- Roth IRA
- Payroll Deduction IRA
- Simplified Employee Pension Plan (SEP)
- Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
- Salary Reduction Simplified Employee Pension Plan (SARSEP)
While choosing your IRA, you should consider your income, retirement goals, employment history, and investment knowledge. We’ll dive into more detail below.
How Does an IRA Work?
For any type of IRA, the premise is that an IRA owner foregoes income today to save and invest in their retirement.
The first step is to set up an IRA account. This account might be employer-sponsored, or you might have to set it up yourself with the help of a financial institution or brokerage.
The regular payments or “contributions” you make to your IRA account can be deducted from your paycheck or from your bank account. They can then be invested in various securities such as stocks, bonds, and certificates of deposit (CDs). In addition, certain types of IRA accounts enable you to invest in alternative asset classes such as real estate, crypto, and even private equity.
You can also choose to opt for a target-date fund if you want to put your IRA on autopilot and minimize your decision-making. A target-date fund is a mutual fund that invests your IRA assets for you. It is specifically designed for retirement, as it reallocates your funds from riskier assets such as stocks to safer assets such as bonds as you grow older.
What Are the Benefits of an IRA?
The primary advantage of an IRA is the tax benefit it provides. As a tax-advantaged account, it typically allows your investments to grow tax-free or tax-deferred.
Depending on the type of IRA you have, you might have to pay taxes before you make your contributions — in which case you’ll avoid paying taxes when you withdraw your money for retirement (also known as IRA distributions). Alternately, you might not pay taxes on your initial contributions, but rather income tax will be levied when you eventually withdraw your money for retirement.
Regardless, the amount in your account can grow tax-free while you save. This means that your earnings or capital gains on your principal are not taxed, enhancing the impact of compounding. This is an excellent benefit, as it allows you to avoid capital gains tax.
Ease of Entry
An IRA is usually quite easy and quick to set up, even for first-time users. Employers may have existing plans that new employees can enroll in when they are hired.
Other options include multiple non-employer sponsored accounts, allowing even business owners and self-employed individuals to start an IRA. While you have to terminate traditional employer-sponsored accounts when you leave a job, you can continue using non-employer-sponsored IRAs as long as you still have taxable income.
An IRA is exclusively yours, meaning that you have more ownership, control, and stake in your retirement decisions.
Traditional employer-sponsored accounts such as 401(k)s usually have a long list of terms and conditions that can severely limit your investment options. Plus, your account will be subject to changes made by your employer.
In the case of an IRA, however, you are the owner and not just a participant. This gives you greater control over decisions that impact your retirement.
If you are currently under a traditional employer-sponsored retirement plan, you can use a Rollover IRA. This offers you an option to move funds from your traditional employer-sponsored account into an IRA.
What Are the Cons of an IRA?
Investing in an IRA makes your funds quite illiquid. Most retirement savings accounts are subject to strict IRS guidelines that dictate when you can withdraw your money — typically only during retirement. The IRS imposes strict tax penalties and includes this amount in your gross income to be taxed if you make an early withdrawal without a qualifying reason.
This makes your money more or less inaccessible till retirement. If you’re regularly making large contributions to your retirement accounts, having less income can decrease your current standard of living or affect you during an emergency.
Operating an IRA account might also be expensive to the beneficiaries due to the fees charged by financial institutions or financial advisors. This might hinder the compounding effect of your investments.
A Dorado IRA attempts to eliminate the middleman and gives you more control of your investment while reducing the fees you typically have to pay. We also allow you to invest in hundreds of cryptocurrencies in a tax-efficient manner.
What Are the Different Types of IRAs?
A Roth IRA is a non-employer-sponsored, tax-advantaged retirement account. It allows your savings to grow tax-deferred without any capital gains tax on your earnings. Your money can be invested in various assets that give you more flexibility than certain employer-sponsored retirement accounts.
In the case of a Roth IRA, contributions to the account are made from your post-tax income, which means you pay tax on your contributions before depositing the amount. You do not pay any tax when you make qualified withdrawals from your account — as long as it has been at least five years since your first Roth IRA contribution.
If you expect to be in a higher income bracket during retirement, a Roth IRA might be worth considering.
However, unlike a Roth IRA, you make your contributions to a traditional IRA with pre-tax income. This means that your IRA contributions are tax-deductible. The extent to which your total contributions can reduce your taxable income depends on your earned income. Moreover, you will have to pay income tax when you eventually withdraw your money in retirement.
If you think your marginal tax rate will be lower when you retire, it may be beneficial to sign up for a Traditional IRA.
How Do You Open an IRA?
One option is to open an IRA account with a financial institution that completely controls your account. For a percentage of your IRA earnings, advisors typically design an optimal portfolio for you.
This choice can work well for savers who want to minimize decision-making. However, the high fees charged by advisors can reduce the compounding effect on your investments and reduce the amount of money in your retirement.
Moreover, with an advisor controlling your account, you have little say in determining what assets you want to invest in. Typically, tax advisors stick to common financial instruments, such as stocks and bonds, and they might avoid more specific assets that you’re interested in like crypto.
Lastly, if your account is part of a larger fund the advisor is managing, your personal needs and goals might be entirely ignored.
A custodian is less of a middleman and more of a facilitator. Custodians typically hold your IRA account and ensure that all your investments comply with IRS regulations. They perform administrative duties that allow your investments to grow in a tax-deferred manner.
While some custodians will provide you with insights, they do not make investment decisions for you.
This setup gives you greater control of your assets and allows you to optimize your portfolio according to what suits you best.
Dorado can help set you up with one of our trusted partner custodians. While Dorado handles the required administrative duties, you maintain complete control of your investments and can let those investments grow.
What Are the Contribution Limits for an IRA?
According to the IRS, the annual contribution limit for calendar years 2022, 2021, 2020, and 2019 is $6,000 — or $7,000 if you are 50 or older. This IRA contribution limit applies to both traditional and Roth IRAs.
Traditional IRAs do not have an income limit, meaning that you can be a millionaire and still contribute to your traditional IRA. However, your tax deductions may be lowered depending on your taxable income. As your income rises, the amount of tax you can reduce through your contributions also decreases.
On the other hand, there are strict income limits, or “phase-outs,” for Roth IRA accounts. If your income exceeds $144,000 as an individual taxpayer or $214,000 as a married couple jointly filing, then you will be disallowed from making any contributions to your Roth IRA account.
Why Should I Consider a Dorado IRA?
Regular investment accounts are taxed when there is a capital gain — a.k.a. an increase in the price of a financial instrument you purchased. A tax is levied on your gains when you sell the instrument.
Additionally, digital assets such as cryptocurrencies are taxed anywhere from 0-37%, depending on your holding period and income. This can massively impact your investments as the power of compounding is reduced.
A Dorado IRA allows you to invest in digital assets while ensuring that your account is tax-deferred. In other words, there is no tax on your capital gains
This improves the power of compounding on your investments.With Dorado, you can invest in alternative asset classes and diversify your portfolio while still complying with IRS guidelines and avoiding higher taxes.
The Dorado platform enables customers to self-trade the cryptocurrencies of their choice. While Dorado manages administrative duties to ensure your account complies with IRS guidelines, you still maintain checkbook control over your IRA investment decisions.
With Dorado, you will be at the forefront of any emerging financial investment opportunity. You can even reallocate your portfolio according to your specific needs as the market changes.
Dorado is on a mission to bring the most diverse offering of digital assets to your retirement account. With a diverse selection of investments like interest-earning stablecoins and cryptocurrencies, you can design your portfolio according to your needs.
For example, certain digital coins like Ethereum are more stable than Bitcoin. With Dorado, you can choose which currencies best suit your risk appetite and long-term investment goals.
Crypto accessibility also gives you a huge advantage of diversifying your portfolio, especially when the stock or the bond markets are underperforming.
The Bottom Line
Most of your investment decisions depend on you and your unique situation. Individual Retirement Accounts are an excellent way to save money for your retirement in a tax-efficient and tax-deferred manner.
Self-Directed IRAs offer superior control over your investment decisions and enable you to invest in alternative investments such as crypto, which can help diversify your portfolio. While opening a self-directed IRA is a relatively straightforward process, you need to decide between opening an account with a custodian or an advisor.
Dorado makes investing in cryptocurrencies easy and accessible for you. If you want to gain the benefits of diversification and stay at the forefront of emerging financial technology while also reaping tax benefits, a Dorado IRA may be the perfect option for you.