What Is an IRA? The Complete Guide

An Individual Retirement Arrangement, known as an IRA, is an important retirement savings vehicle, especially for people who are not covered by a retirement plan at work.

Knowing the different kinds of IRAs and how they work can help you decide which investment vehicles take you toward a more comfortable retirement.

This comprehensive guide covers key aspects involved in choosing and using an Individual Retirement Arrangement (IRA).

The topics range through all stages of having an IRA, from setting one up through making contributions to eventually taking your money out of the plan.

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What Is an IRA?

An Individual Retirement Arrangement, or IRA, is a retirement savings account that you as an individual can set up to defer certain tax obligations until retirement.

The main advantage of an IRA is that your money is allowed to grow tax-free and, in many cases, you can manage your eventual withdrawals from the plan so they come at a time when you are in a lower tax bracket.

So IRAs offer certain tax advantages, but they also impose certain restrictions.

Knowing about those advantages and restrictions should help you decide whether to open an IRA and which type of IRA is best for your situation.

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How Does an IRA Work?

An IRA differs from an employee-sponsored retirement plan like a 401(k) in that it is an individual plan in your name rather than a collective plan covering a group of employees. This gives you greater control over how the plan is managed.

The main characteristic of an IRA is a trade-off:

You commit your money until you reach retirement age (or something close to it) in exchange for certain tax breaks.

Tax breaks are intended to encourage people to save for retirement and also to help investments within an IRA grow.

The exact nature of those tax breaks depends on the type of IRA. There are two basic types:

1. Traditional IRAsMain Characteristic: With a traditional IRA, you can deduct your contributions to the plan and defer paying taxes until you start to draw money out of the plan.
2. Roth IRAsMain Characteristic: With a Roth IRA, you don’t get an initial deduction for your contributions, but then qualified distributions taken out of the plan later on are tax-free.

[These IRAs are generally set up independent of the workplace. However, two types of IRAs – SEP and SIMPLE IRAs – are designed to work within the context of small businesses. Details on SEP and SIMPLE IRAs are explained below.]

Characteristics all IRAs share

Though the exact workings of an IRA depend on which type it is, they all have some general characteristics in common:

• Money may be put into the IRA by the owner of the account (or, in the case of SIMPLE and SEP plans, by the employer of the account owner).
• IRA owners get a break on their income taxes in exchange for putting money in the plan. In some cases, this comes when the contribution is made and in other cases it’s when money is taken out of the plan.
• There are limits to how much you can put into an IRA each year.
• Investment earnings (including income and capital gains) on money within the IRA is not taxed.
• Money cannot be taken out of an IRA until you reach age 59½. Withdrawing money earlier than that, except in limited hardship circumstances, results in a 10% penalty on top of any income tax owed on the withdrawal.

One characteristic that differs by IRA type – when money is taxed

Depending on the type of IRA, money is either taxed before it goes into the IRA or when you take it out. However, in either case a key advantage is that, while money is in the IRA, its investment growth is not slowed down by taxes.

Before getting into the details of how all this works for each type of IRA, a good starting point is to discuss how money can go into and be taken out of an IRA.

Understanding how that works helps explain the differences between the different types of IRA, and how they might affect you.

Who Can Put Money Into an IRA?

A great thing about IRAs is that most people who have earned income can put money into an IRA. There used to be an age limit of 70½ for making contributions to a traditional IRA, but this has been repealed.

Income restrictions can limit IRA contributions

These restrictions can apply if you make too little income or too much.

• Minimum income limitsOne restriction is that you can’t make a contribution to an IRA that exceeds your earned income for the year.

  If you are married and file joint tax returns, you both can contribute to an IRA even if only one of you earns income. However, your combined contributions cannot exceed your combined income.

• Maximum income limitsIf either you and/or your spouse is covered by a retirement plan at work, your ability to contribute to an IRA may be restricted based on your income.

  These restrictions may reduce or even eliminate how much you are able to put into an IRA. The way these restrictions are applied varies depending on your income and your marital status, so check IRS guidelines for details.

• Contribution amountsAs long as you are within the minimum and maximum income guidelines, the amount you can contribute to an IRA depends on the type of IRA.

  The specific contribution limits in each case is described in subsequent sections of the different types of IRA. These include catch-up contributions, which for most IRAs allow people aged 50 or older to contribute additional amounts each year.

It is possible to have more than one IRA. However, the annual contribution limits apply to the total of all your IRA contributions.

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Taking Money Out of an IRA

Once you put money into an IRA, you are not supposed to take it out until you reach age 59½.

There are some exceptions to this rule in the case of disability or to pay certain medical or higher education expenses. Also, qualified first-time home buyers may be able to take up to $10,000 out of an IRA to put toward the purchase of a home.

If you are younger than 59½ and do not qualify for any of the above exceptions, any withdrawals you make from an IRA will be subject to a 10% penalty. This is on top of any ordinary income taxes you owe on the amount taken out.

Tax treatment

Even if you meet the requirements for taking money out of an IRA without a penalty, the amount you take out may be subject to income tax. Roth IRAs are an exception to this. (See the section on Roth IRAs for more details).

To a large extent, you can vary the timing of when you take money out of an IRA and how much you take. This allows you to manage the tax liability from those distributions to a large degree too.

However, you cannot put off paying taxes on the money that goes into your IRA forever.

In the case of Roth IRAs, you pay taxes on that money up front. With other IRAs, you are required to start taking out a certain amount of money each year once you reach a certain age. Those withdrawals are subject to income tax.

Why is an IRA a Good Deal?

As noted previously, IRAs do not allow you to escape taxation forever. You either have to pay taxes on your money before it goes into the IRA or as it comes out.

Since you have to pay taxes at some point, what makes IRAs such a good deal?

The key is that, while your money is in the IRA, the money it earns by being invested can compound without taxes being taken out from year to year.

Over time, this ability of investment earnings to compound without year-to-year taxation makes a big difference.

Advantages of Tax-Free Investing – an Example:

Consider what could happen to $5,000 over 30 years if you are in a 30% income tax bracket and are able to earn 8% a year in investment returns.

In an IRA, you’d either pay taxes on that $5,000 up front or you’d pay taxes on the value of that money when you took it out of the IRA in retirement.

In either case, compounding in an IRA at 8% a year for 30 years would allow that $5,000 to grow to $35,219.30 after taxes.

However, if you simply invested that money outside of an IRA, you would not only pay taxes on the $5,000 up front, but your investment earnings would be subject to taxation from year to year.

Because of this, even after earning 8% for 30 years, that $5,000 would only be worth $17,946.74 after taxes. That’s barely half what it would have grown to in an IRA.

So, while an IRA may not allow you to escape taxation altogether, it can reduce the impact of taxes on your money. That’s what makes an IRA a good deal.

Now let’s look at some specifics on how that deal works in different types of IRAs.

What is a Traditional IRA and How Does It Work?

As the name suggests, a traditional IRA is the original type of IRA plan. It allows account owners to put off paying taxes on money they put into the IRA until they retire.

How does that work?

If you meet the eligibility requirements as discussed below, you can contribute up to $6,000 a year to an IRA. If you are aged 50 or older, you may also put in an additional $1,000 catch-up contribution.

Those contribution limits are subject to change in the future, so check the limits each year you plan to make a contribution.

Your contributions are fully deductible from your taxable income. Also, your investment earnings on money in your IRA are not taxed from year to year.

The money in your IRA is not taxed until you start to take money out of the plan. You can do that once you reach age 59½.

Any withdrawals you take once you reach that age are included in your income and taxed at your ordinary income tax rate. Up to that point, your money can benefit from investment growth without taxation.

There is a penalty if you take money out of a traditional IRA before you reach age 59½. In addition to paying ordinary income tax on the amount you withdraw, you would have to pay a 10% penalty.

Once you reach age 59½, you can take as much or as little out of your IRA as you want each year. However, once you reach a certain age, you are required to start taking money out of your IRA and paying taxes on that money. These are called required minimum distributions (RMDs).

The rules for RMDs have changed, so they depend not just on your age, but when you reached certain age levels:

• If you turned age 70½ prior to December 31, 2019, you must start making RMDs as of the tax year in which you turned that age.
• If you turned age 70½ after December 31, 2019, you don’t have to take RMDs until the tax year in which you turn age 72.

Who can put money into a traditional IRA?

Generally speaking, as long as you or your spouse (if you file joint tax returns) had taxable income during the year, you can put money into an IRA.

However, if you or your spouse are covered by another retirement plan at work and earn a high income, the amount you can put into an IRA may be limited. See IRS guidelines for how these limits apply to your situation and your income.

What is a Roth IRA and How Does It Work?

Unlike contributions to a traditional IRA, contributions to a Roth IRA are not tax-deductible. However, you do not have to pay taxes when you take money out of a Roth IRA as long as you meet certain requirements.

You can contribute to a Roth IRA at any age. The contribution limit is currently $6,000 a year, though that amount may change over time.

If you are aged 50 or older, you can put in an additional $1,000 in catch-up contribution.

These contribution amounts may be limited if you or your spouse is covered by a retirement plan at work. These limitations depend on your filing status and your income, so see IRS guidelines for how they apply to your situation.

Since Roth IRA contributions are not tax deductible, why are they a good deal?

The reason is that, for as long as the money is in the Roth IRA, it can grow free of taxes.

Once you reach age 59½, you can then take money out of your Roth IRA without including it in your taxable income, as long as it has been at least five years since you first contributed to the plan. There is a 10% penalty if you take money out of a Roth IRA and do not meet those requirements or qualify for an exception.

Unlike traditional IRAs, Roth IRAs do not have required minimum distributions. The advantage of this is that it allows you to keep your money invested tax-free in the plan for as long as you like.

What is a SEP IRA and How Does It Work?

A Simplified Employee Pension (SEP) is an employee benefit plan designed for small employers. This includes people who are self-employed.

It is a form of IRA because it involves the employer setting up an IRA account for each eligible employee. However, instead of employees contributing to their own IRAs, the employer does it on their behalf.

To be eligible for SEP IRA contributions, an employee must be at least 21, have worked for you in at least three of the past five years, and have earned at least $600 in compensation from you in the current tax year.

An advantage of a SEP IRA is that it allows people who run a small business to contribute much more than the normal IRA limits on their own behalf and on behalf of their employees.

The contribution limits for a SEP IRA are the lesser of:

• 25% of the employee’s compensation
• $56,000

The disadvantage may be that having a SEP plan requires the business owner to contribute on behalf of all eligible employees, except those covered by negotiated union benefits and nonresident alien employees who have received no U.S. compensation from the company.

From a tax standpoint, SEP IRAs work much the same way as a traditional IRA. The employer gets to deduct contributions as they go into the plan, and distributions are taxed as income to the account owner as they come out of the IRA.

As with other IRAs, there is a 10% tax penalty for distributions taken before the age of 59½.

What is a SIMPLE IRA and How Does It Work?

A Savings Incentive Match Plan for Employees, or SIMPLE plan, is another form of retirement plan for small employers.

It can work as sort of a cross between an IRA and a 401(k) plan.

As with a 401(k) plan, both the employer and the employee can contribute on the employee’s behalf. However, to simplify administration, the money can go into individual IRAs set up on each employee’s behalf rather than into a centralized employee benefit fund.

Companies with no more than 100 employees who received at least $5,000 in compensation from the company in the previous year can have a SIMPLE plan.

Employees can contribute up to $13,500 of their salaries to a SIMPLE plan. Those who are aged 50 or older can also contribute an additional $3,000 in catch-up contributions.

Employers have a choice of how they contribute to these plans. They can either set up the plan to match the employee’s contribution for up to 3% of the employee’s compensation, or they can contribute up to 2% of the employee’s compensation regardless of whether or not the employee contributes to the plan.

However they set up their contributions, employers must make those contributions on behalf of all eligible employees.

Eligible employees are those who made at least $5,000 from the company in any two years prior to the current year, and are expected to earn at least $5,000 in the current year.

There is an exception to the employer contribution requirement for employees covered by negotiated union benefits and nonresident alien employees who received no U.S. compensation from the company.

From a tax standpoint, SIMPLE IRAs work much the same way as a traditional IRA. The employer and employees each get to deduct their contributions as they go into the plan, and distributions are taxed to the account owner as they come out of the IRA.

As with other IRAs, there is a 10% tax penalty for distributions before the age of 59½.

Choosing Between a Traditional and a Roth IRA

When setting up an IRA on their own behalf (as opposed to as an employee benefit plan), an individual has the choice between a traditional and a Roth IRA.

That choice comes down to whether to pay taxes on your money before it goes into the plan or to deduct your IRA contribution and pay taxes as money comes out of the plan.

If the tax rate now and when you take money out of the plan were the same, it should make no difference in the long run whether you pay taxes up front or later. However, if you expect your tax rate to be different in retirement than it is now, it could guide your choice between a traditional and a Roth IRA.

For example, a young person just starting a career might not earn much and thus be in a low tax bracket. It might make sense to pay taxes now rather than later on. That would make a Roth IRA the better choice.

In contrast, a person in their peak earning years may be in a higher tax bracket than they expect to be in once they retire. In that case, paying taxes later with a traditional IRA might make more sense.

The following chart summarizes some of the key distinctions between traditional and Roth IRAs:

When can you contribute?

You can contribute at any age when you have taxable compensation, though income limits apply.

	Traditional IRA	Roth IRA
How much can you contribute?	$6,000 per year, or $7,000 if you are aged 50 or older	$6,000 per year, or $7,000 if you are aged 50 or older
Are contributions tax-deductible?	Yes, though the deduction may be limited for high-earners if you or your spouse are covered by a retirement plan at work	No
Are investment earnings taxable from year to year?	No	No
When can you withdraw money without penalty?	Age 59 ½	Age 59 ½, but withdrawals also must be at least five years after the IRA was established.
Are qualifying withdrawals taxable?	Yes	No
Are there required minimum distributions?	Yes, you are required to start taking distributions once you reach age 70 ½	No, as long as you are the original owner of the IRA

Key selection factors:

Given the differences between Roth and traditional IRAs, consider these factors when deciding which is best for you:

• Current tax statusIf you are in a high tax bracket, you are likely to benefit most from a traditional IRA that lets you take the tax deduction now. You will have to pay tax on withdrawals later on, but you may be in a lower tax bracket once you retire.

  If you are currently in a low tax bracket, a Roth might be best because it will allow you to avoid paying tax on withdrawals later on, when you may be in a higher bracket.

• AgeFor the tax reasons explained above, Roth IRAs are often recommended for younger adults on the assumption that they are likely to be in lower tax brackets early in their careers.

  Roth IRAs can also make the most sense for workers at or close to retirement age who still consider it worthwhile to make long-term retirement investments.

• Retirement fundingIf your retirement funding looks like it will be ample enough that you wouldn’t spend all of the required distributions from a traditional IRA, you might do better with a Roth IRA so more of your money could continue to benefit from tax-free growth in your retirement years.

Investing an IRA

IRAs can be invested in a wide range of vehicles, including mutual funds and individual stocks and bonds.

Mutual funds are a good way to get professional management and diversification with even a relatively small amount of money. As you accumulate a larger amount in your IRA, building a portfolio of individual securities might also become an option.

Because IRAs are intended for long-term retirement savings, it is generally a good idea to have some portion of your IRA in growth investments like stocks, especially when you are younger.

Then, as you approach retirement age, you might shift more of your IRA into conservative investments like short-term bonds, cash equivalents or even savings accounts. These provide the stability and liquidity you will need when you start taking money out of the plan in retirement.

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Choosing Where to Open an IRA

IRAs are provided by a wide range of financial institutions, including banks, brokerage firms and insurance companies.

It makes sense to decide how you will want to invest your IRA before you choose where to open it. That way you can choose a firm that has the investment products to meet your needs.

Ideally, you should find a firm with a wide range of product offerings. This will give you the flexibility to change your investments as your needs change.

Always pay close attention to all fees before choosing an IRA provider. These fees may include trading commissions, account maintenance fees, fund management fees and sales loads. While you can’t control the returns your investments will earn, you can control the fees you pay.

Your IRA should prove to be very important to you for many years to come. That makes it well worth the time it takes to choose a provider carefully.

Frequently Asked Questions

Q: I have money in a SIMPLE IRA at a former employer. I am 64 and still working, and would like to move my money to a place closer to home. Can I put the money into staggered CDs without a bank or broker being involved, and without tax penalty? Or do I have to open an IRA at another bank, and then have them put the money into CDs for me? 

A: Based on what you are looking to accomplish, choosing a bank for your rollover is probably the most straightforward approach. This should help shield you from incurring tax consequences on your rollover before you need to, and give you ready access to a range of CD products for constructing a CD ladder (i.e., a series of CDs with staggered maturities).

Cash out SIMPLE IRA: rules and options

Being over 59 1/2 gives you a wider set of options for cashing out a SIMPLE IRA at your former employer.

Worst case, taking money our of a retirement plan can have two types of tax consequences. One is the need to immediately pay income taxes on the withdrawal, and the other is an early-distribution tax penalty. For most retirement plans, this penalty is 10%, but in the case of a SIMPLE IRA it can be as high as 25 percent if it has been less than two years since you began participating in the plan.

Fortunately for you, the early-distribution penalty does not apply if you are older than 59 1/2. So that just leaves ordinary income tax to worry about.

You can defer this by rolling the money into another qualified plan – either a SIMPLE IRA, or a traditional IRA if it is a least two years since you started participating in the SIMPLE IRA. Rolling over into another tax-deferred retirement plan allows you to delay paying income tax on the money until you need to withdraw it, and enables you to withdraw the money over a period of years rather than risk bumping yourself into a higher tax bracket by withdrawing it all at once.

One reason why it might be helpful to work with a bank in this context is that a trustee-to-trustee transfer from your current plan to a bank IRA can help make sure this is not considered a taxable distribution from the plan.

Q: Can I Contribute to an IRA After Retirement?

Generally speaking, you are allowed to continue to contribute to an IRA after retirement, but there are restrictions.

There are also limits to the benefits of contributing to an IRA after retirement, depending on your circumstances.

This article will answer questions about contributing to an IRA after retirement, such as:

• Can I contribute to an IRA after retirement?
• Are IRA contributions tax deductible after retirement?
• What are the benefits of contributing to an IRA after retirement?
• Does continuing to put money in my IRA after I retire affect how I should invest it?

Under the right circumstances, continuing to contribute to an IRA after you reach retirement age could help build your nest egg and reduce the amount of taxes you pay.

IRA Contribution Limits

A good starting point is to look at IRA contribution limits.

IRA contributions are limited by three types of conditions: dollar amount, an income ceiling and an income minimum.

Dollar amount

You can only contribute to an IRA up to a certain limit each year.

As of 2021, that limit was $6,000 a year, or $7,000 if you’re age 50 or older. These limits are adjusted periodically for inflation.

Income ceiling

The amount you can contribute to a Roth IRA or deduct for contributing to a traditional IRA may be limited if your income exceeds a certain amount.

Income ceilings apply to contributions to a Roth IRA under any circumstances. For traditional IRAs, they depend on whether you are covered by an employer’s retirement plan.

The exact amount of the income ceiling depends on your marital status. These amounts are adjusted periodically for inflation.

Income minimum

If you’re single, the amount you can contribute to a Roth IRA, or deduct for contributing to a traditional IRA, cannot exceed your taxable compensation for the year.

If you’re married, your combined contributions to IRAs cannot exceed your combined income.

There Is No Longer an Age Limit for IRA Contributions

Note that while there are dollar amount and income restrictions limiting IRA contributions, there is not a limit based on age.

There used to be a rule banning contributions to a traditional IRA once you reached age 70 ½.

This changed with the passage of the SECURE Act in 2019. Now there is no age limit on making IRA contributions.

However while there is no age limit, there are factors that may restrict your ability to make IRA contributions after retirement.

How are IRA Contributions Tax Deductible?

One thing to consider when deciding whether to make IRA contributions after retirement is the way the tax benefits of IRAs work.

• Traditional IRAs give you a deduction when you put money in, and tax money when you take it out.
• Roth IRAs give no deduction on money going in, but don’t tax it when you take it out.

What both have in common is that your investments in the IRA are not taxed from year to year. This is a very important factor in deciding whether to contribute to an IRA after you’ve reached retirement age.

IRA Withdrawals

It may seem strange to have to think about withdrawals at the same time you’re considering contributing to an IRA. However, rules concerning IRA withdrawals may influence your decisions about contributions.

For one thing, as noted in the previous section, money is essentially taxed on the way into Roth IRAs and on the way out of traditional IRAs.

The other important factor is that traditional IRAs are subject to required minimum distributions (RMDs). Once you reach age 72, you are required to start taking money out of a traditional IRA each year.

You can still make contributions to an IRA even while making RMDs, but having to make RMDs would limit the effectiveness of those contributions. Also, making contributions might increase the amount of the RMDs you are required to make in future years.

So, once you start making RMDs, contributing to your IRA would have a somewhat limited benefit. You might have to take money out and pay taxes on it soon after you took a tax deduction for contributing it.

Benefits of Contributing to an IRA After Retirement

Even given all the limitations discussed above, there may still be some benefits to contributing to an IRA after retirement, assuming you meet the requirements for making IRA contributions.

With either type of IRA, your money is taxed at some point: on the way in with Roth IRAs, and on the way out with traditional IRAs.

However, while your money is in the IRA, your investment earnings are not taxed. So, IRAs allow you to benefit from tax-free compounding.

Another benefit is that they allow you to somewhat manage when you pay taxes. If you think you are in a low tax bracket now, it might be a good idea to pay taxes upfront by contributing to a Roth IRA.

If you think you might be in a lower tax bracket later on, it might make sense to take a deduction now by contributing to a traditional IRA. So there can be a tax timing benefit to contributing to an IRA.

These advantages of tax-free compounding and tax timing continue to some degree after you reach retirement age. They are especially valuable before you turn age 72.

That’s because prior to turning 72 you don’t have to take RMDs from a traditional IRA. So, you can pick between contributing to a Roth or a traditional IRA without having your contributions offset by RMDs.

RMDs diminish the benefit of contributing to a traditional IRA once you reach age 72. Also, the benefit of IRA contributions may be reduced as you get older because of two other things:

• Diminishing income. You or your spouse must have compensation income for you to contribute to an IRA. Even if you continue to work past traditional retirement age, your compensation is likely to tail off at some point.
• Diminishing time. The benefit of tax-free compounding within an IRA has the most impact the longer you remain invested. The older you get, the less time there is for this to take affect.

In short, contributing to an IRA is like a lot of things as you get older: it may still be worth doing, just don’t expect it to be like it was when you were younger.

How Contributing Affects Investment

If you continue contributing to an IRA after you reach retirement age, it could impact how you invest that IRA.

As a rule of thumb, investments should get more conservative as you get older. However, this depends greatly on whether you’re still putting money into a retirement plan or starting to take it out.

Once you start taking money out, your overall investment position should become more conservative for two reasons:

1. You need liquid assets to make cash available for your withdrawals.
2. You should avoid wild fluctuations in value that might affect how much money you have when you need to draw on it.

However, as long as you’re still putting more into a retirement plan than taking out, you can generally afford to be less conservative.

After all, if you’re making contributions you don’t need liquidity for withdrawals.

Also, since the time when you’ll need to start making withdrawals is still in the future, you can stand a little more volatility.

Choosing the Right Account for Your IRA

Your IRA can remain a vital investment account well into your retirement.

You may have to make some changes over time, but even in retirement it’s important to find the right type of account for your IRA.

Here are some guidelines for doing that:

1. Decide what kind of investments you need. If you’re still contributing to your IRA, you may want to keep the emphasis on growth investments. If you’re withdrawing from your IRA, you may want to downshift to more stable investments. Many people find they need a mix of both.
2. Choose an investment account for growth. This may be a brokerage account that allows you to buy individual securities or mutual funds in line with a growth strategy. Or, you may prefer a managed account or a robo advisor that will make decisions for you.
3. Use an account suited to your liquidity needs. Once you start making substantial withdrawals from your IRA, you should make sure you have stable and liquid investments to provide for those withdrawals. Bank savings accounts or certificates of deposits (CDs) can be used for this purpose, as can non-bank cash management accounts.

Q: Now that I’m over the age of 59 1/2, can close my IRA and simply keep the proceeds in a money market account at the same bank for easy access?

A: Being older than 59 1/2 means that you can close out your IRA without incurring the 10% tax penalty on early withdrawals, but there are other reasons why it might not be to your advantage to close out your IRA just yet.

Tax impacts of withdrawing from IRA retirement savings

Even though you are old enough to avoid that 10% tax penalty, there still may be some tax disadvantages to taking all the money out of your IRA now. Whether or not you transfer the money to an account at the same or a different bank, once it comes out of the IRA, the tax implications kick in.

First of all, if it is a traditional IRA then the money in it becomes subject to ordinary income tax as soon as you withdraw it. What you need to consider in that case is whether drawing the money out all in one lump sum will kick you up into a higher tax bracket this year. You may pay less taxes in the long run by stretching withdrawals out over several years, to keep you in a lower tax bracket.

Even if the account is in a Roth IRA and withdrawals are therefore not taxable, until you withdraw that money, you are still benefiting from having your investments within the IRA compound tax free until you take them out. Why give up that advantage any earlier than you need to?

Q: When I left my former employer, I rolled my retirement plan balance into an IRA with the same company that handled the retirement investments for my employer. It’s invested in money market and mutual funds, but because of the fees they charge, the account seems to be declining every month. I want to transfer the account to a CD at a local bank. Can I do this without a penalty?

A: Yes — you should be able to transfer your IRA without penalty. Just make sure you do the following:

• Choose a qualified IRA trustee to be the destination for the account (chances are your local bank is qualified to be an IRA trustee, but you should confirm that before moving the money).
• Notify your current investment company in writing that you wish to make an IRA-to-IRA transfer. Documenting this specifically is important so that investment company does not report the transaction as a distribution out of the IRA, which would have tax consequences.

It sounds like you have good justification for making this change. There’s no reason why money market accounts should be charging you hefty investment management fees. As for the part of the account that is in mutual funds, with the strong run the stock market has made so far in 2013, your investments must be underperforming quite badly if you’re losing money.

While it sounds like leaving your current investment firm is a good decision, make sure you don’t trade one bad situation for another. Before you choose a new IRA trustee, make sure they have the types of services you need, and that their products are competitive.

For example, since you mention CDs, check to see how the rates at the bank you have in mind stack up with the best CD rates on the market. Make sure this is an apples-to-apples comparison, in which you compare CDs for the same time frame and account size. If this is retirement money you don’t plan on needing for a while, you might consider a longer-term CD, since the best CD rates are typically found in longer-term products.

Beyond CDs, you might want to check what investment products the bank also has available, in case you want to diversify your investments. The wisdom of doing this is somewhat dependent on your time frame, but if you are investing for the long term, you might consider putting a portion of your money into stocks, because this can help you keep up with inflation. Just be sure to check on how the bank’s stock investments have performed — especially after all fees have been accounted for.