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What Are the Benefits and Drawbacks of IRAs?

Individual retirement arrangements (IRAs) are a popular way to save for retirement, and with good reason—they come with numerous benefits for investors building long-term wealth. They also come with a few drawbacks you should be aware of. In this post, we’ll break down what you need to know, focusing on two popular account types: traditional IRAs and Roth IRAs. 

IRA benefits

IRAs are tax-advantaged

Itrust IRAs are fully automated to make retirement saving simple. Open a Itrust IRA

 

Perhaps IRAs’ best known benefit is their tax-advantaged status—this benefit is designed to  encourage you to put money away for later. The tax advantages of traditional IRAs and Roth IRAs are slightly different. 

Traditional IRAs let you take a tax deduction in the year you contribute as long as you (and your spouse, if you have one) don’t have a retirement plan like a 401(k) plan at work. If you or your spouse do have a 401(k) plan at work, you can still deduct at least some of your contribution as long as you earn under $87,000 as a single filer or $143,000 as a married couple filing jointly for 2024 (for 2025, those numbers rise to $89,000 and $146,000 respectively). If your income is above the IRS limits and you’re covered by a retirement plan at work, you can’t deduct any part of your contributions (but you can, of course, still contribute). If your contributions were tax-deductible, when you take qualified distributions in retirement, those distributions are taxed like regular income. 

With Roth IRAs, you don’t get a tax break in the year you contribute, but any growth and distributions in retirement that meet the IRS’s rules (also called “qualified distributions’) will be tax-free. However, not everyone is eligible to contribute directly to a Roth IRA. In 2024, you can’t contribute to a Roth IRA directly if you earn $161,000 or more as a single filer or $240,000 or more as a married couple filing jointly (those numbers rise to $165,000 and $246,000 respectively in 2025). There’s a way around this. You can complete what’s known as a “backdoor Roth,” where you make a non-deductible contribution to a traditional IRA for the purpose of converting it to a Roth IRA. Itrust automates this process so it takes just a few clicks. Once you’ve completed the conversion, you get the same tax benefits you’d get if you contributed to a Roth IRA directly. 

IRAs have more investment options than 401(k) plans

If you have a 401(k), you’ve probably already noticed that it doesn’t give you many choices when it comes to how your money gets invested. Fortunately, this isn’t the case for IRAs. Usually IRAs, much like taxable investment accounts, come with many investment options. At Itrust, you can customize your IRA with hundreds of investments or invest in a pre-made Classic or Socially Responsible portfolio. 

IRAs are more flexible and liquid than you might think

Roth IRAs in particular come with a surprising amount of flexibility. If you make direct contributions to a Roth IRA, you can typically withdraw these contributions early, which means before age 59 ½, without paying additional taxes or a penalty (which isn’t the case for a 401(k) or traditional IRA). However, you’ll still owe income tax and a 10% penalty on earnings (or money you earn on your contributions) you take out of your Roth IRA before retirement with a few exceptions. For example, one popular exception allows you to withdraw up to $10,000 in earnings for a first-time home purchase. 

If you have a traditional IRA, you might be able to execute a Roth conversion and benefit from the flexibility that comes with a Roth IRA. If you decide to do this, Itrust offers easy Roth conversions that eliminate the paperwork and hassle. Just keep in mind that you need to wait at least five years after the Roth conversion to be able to withdraw contributions without paying a penalty.

IRAs can often have lower fees than 401(k) plans

At Itrust, we think it’s important to minimize fees. When you invest, you’ll typically pay for what’s known as the expense ratio (the fee charged by an ETF’s issuers to manage the fund) as well as advisory fees. It’s important to keep an eye on the fees you’re paying, because over time they eat into your returns.

Average 401(k) advisory fees are generally between 0.5% and 2%. IRAs, on the other hand, are typically less expensive. Itrust IRAs are subject to our low 0.15% annual advisory fee.

IRA drawbacks

IRAs have low annual contribution limits

One drawback of using IRAs to save for retirement is that the annual contribution limits are relatively low. In 2024, you can contribute up to $23,000 to a 401(k) plan (and up to $23,500 in 2025), but you can only contribute $7,000 to an IRA in 2024 (also $7,000 in 2025) unless you’re at least 50 years old, in which case the limit is $8,000 in 2024 and also $8,000 in 2025. 

IRAs sometimes have early withdrawal penalties

If you have a traditional IRA and withdraw from the account before age 59 ½ , you’ll generally pay a 10% penalty and income tax. There are a few exceptions to this, like if you withdraw up to $10,000 for a qualified first-time home purchase or lose your job and withdraw to pay health insurance premiums, under certain conditions.

As we explained above, Roth IRAs are significantly more flexible when it comes to withdrawing your contributions before retirement—you can typically do this without paying taxes or penalties. But if your early withdrawal exceeds your contributions and you take out earnings, or if you had previously completed a Roth conversion, you may be subject to taxes and a 10% penalty when you file your taxes with the IRS.

Some IRAs have required minimum distributions (RMDs)

If you have a traditional IRA, once you reach age 73 you have to start withdrawing at least a minimum amount of money each year—this is called an RMD. The amount you must withdraw is your account balance at the end of the previous year divided by the “distribution period,” which is based on your age and set by the IRS each year. You can also calculate your RMDs using this tool from investor.gov. Practically speaking, RMDs mean your earnings can’t compound in a traditional IRA indefinitely. This rule doesn’t apply to Roth IRAs, however. If you have a Roth IRA, you typically don’t have to take RMDs during your lifetime unless you inherited the account. 

The bottom line

IRAs can be a powerful tool for building long-term wealth. If you’re thoughtful about your contributions and only invest money you won’t need until retirement, the benefits of these accounts outweigh the drawbacks. 

We know choosing the right IRA can feel tricky, so we developed our IRA calculator to help you determine what kind of account is right for your specific situation. Just enter your filing status, income, and a few other details and we’ll help you figure out the rest. When you’re ready to start saving, Itrust offers traditional and Roth IRAs, as well as SEP IRAs and rollover IRAs so you can save for retirement on your own terms. 

What Are the Benefits and Drawbacks of IRAs?

Individual retirement arrangements (IRAs) are a popular way to save for retirement, and with good reason—they come with numerous benefits for investors building long-term wealth. They also come with a few drawbacks you should be aware of. In this post, we’ll break down what you need to know, focusing on two popular account types: traditional IRAs and Roth IRAs. 

IRA benefits

IRAs are tax-advantaged

Itrust IRAs are fully automated to make retirement saving simple. Open a Itrust IRA

 

Perhaps IRAs’ best known benefit is their tax-advantaged status—this benefit is designed to  encourage you to put money away for later. The tax advantages of traditional IRAs and Roth IRAs are slightly different. 

Traditional IRAs let you take a tax deduction in the year you contribute as long as you (and your spouse, if you have one) don’t have a retirement plan like a 401(k) plan at work. If you or your spouse do have a 401(k) plan at work, you can still deduct at least some of your contribution as long as you earn under $87,000 as a single filer or $143,000 as a married couple filing jointly for 2024 (for 2025, those numbers rise to $89,000 and $146,000 respectively). If your income is above the IRS limits and you’re covered by a retirement plan at work, you can’t deduct any part of your contributions (but you can, of course, still contribute). If your contributions were tax-deductible, when you take qualified distributions in retirement, those distributions are taxed like regular income. 

With Roth IRAs, you don’t get a tax break in the year you contribute, but any growth and distributions in retirement that meet the IRS’s rules (also called “qualified distributions’) will be tax-free. However, not everyone is eligible to contribute directly to a Roth IRA. In 2024, you can’t contribute to a Roth IRA directly if you earn $161,000 or more as a single filer or $240,000 or more as a married couple filing jointly (those numbers rise to $165,000 and $246,000 respectively in 2025). There’s a way around this. You can complete what’s known as a “backdoor Roth,” where you make a non-deductible contribution to a traditional IRA for the purpose of converting it to a Roth IRA. Itrust automates this process so it takes just a few clicks. Once you’ve completed the conversion, you get the same tax benefits you’d get if you contributed to a Roth IRA directly. 

IRAs have more investment options than 401(k) plans

If you have a 401(k), you’ve probably already noticed that it doesn’t give you many choices when it comes to how your money gets invested. Fortunately, this isn’t the case for IRAs. Usually IRAs, much like taxable investment accounts, come with many investment options. At Itrust, you can customize your IRA with hundreds of investments or invest in a pre-made Classic or Socially Responsible portfolio. 

IRAs are more flexible and liquid than you might think

Roth IRAs in particular come with a surprising amount of flexibility. If you make direct contributions to a Roth IRA, you can typically withdraw these contributions early, which means before age 59 ½, without paying additional taxes or a penalty (which isn’t the case for a 401(k) or traditional IRA). However, you’ll still owe income tax and a 10% penalty on earnings (or money you earn on your contributions) you take out of your Roth IRA before retirement with a few exceptions. For example, one popular exception allows you to withdraw up to $10,000 in earnings for a first-time home purchase. 

If you have a traditional IRA, you might be able to execute a Roth conversion and benefit from the flexibility that comes with a Roth IRA. If you decide to do this, Itrust offers easy Roth conversions that eliminate the paperwork and hassle. Just keep in mind that you need to wait at least five years after the Roth conversion to be able to withdraw contributions without paying a penalty.

IRAs can often have lower fees than 401(k) plans

At Itrust, we think it’s important to minimize fees. When you invest, you’ll typically pay for what’s known as the expense ratio (the fee charged by an ETF’s issuers to manage the fund) as well as advisory fees. It’s important to keep an eye on the fees you’re paying, because over time they eat into your returns.

Average 401(k) advisory fees are generally between 0.5% and 2%. IRAs, on the other hand, are typically less expensive. Itrust IRAs are subject to our low 0.15% annual advisory fee.

IRA drawbacks

IRAs have low annual contribution limits

One drawback of using IRAs to save for retirement is that the annual contribution limits are relatively low. In 2024, you can contribute up to $23,000 to a 401(k) plan (and up to $23,500 in 2025), but you can only contribute $7,000 to an IRA in 2024 (also $7,000 in 2025) unless you’re at least 50 years old, in which case the limit is $8,000 in 2024 and also $8,000 in 2025. 

IRAs sometimes have early withdrawal penalties

If you have a traditional IRA and withdraw from the account before age 59 ½ , you’ll generally pay a 10% penalty and income tax. There are a few exceptions to this, like if you withdraw up to $10,000 for a qualified first-time home purchase or lose your job and withdraw to pay health insurance premiums, under certain conditions.

As we explained above, Roth IRAs are significantly more flexible when it comes to withdrawing your contributions before retirement—you can typically do this without paying taxes or penalties. But if your early withdrawal exceeds your contributions and you take out earnings, or if you had previously completed a Roth conversion, you may be subject to taxes and a 10% penalty when you file your taxes with the IRS.

Some IRAs have required minimum distributions (RMDs)

If you have a traditional IRA, once you reach age 73 you have to start withdrawing at least a minimum amount of money each year—this is called an RMD. The amount you must withdraw is your account balance at the end of the previous year divided by the “distribution period,” which is based on your age and set by the IRS each year. You can also calculate your RMDs using this tool from investor.gov. Practically speaking, RMDs mean your earnings can’t compound in a traditional IRA indefinitely. This rule doesn’t apply to Roth IRAs, however. If you have a Roth IRA, you typically don’t have to take RMDs during your lifetime unless you inherited the account. 

The bottom line

IRAs can be a powerful tool for building long-term wealth. If you’re thoughtful about your contributions and only invest money you won’t need until retirement, the benefits of these accounts outweigh the drawbacks. 

We know choosing the right IRA can feel tricky, so we developed our IRA calculator to help you determine what kind of account is right for your specific situation. Just enter your filing status, income, and a few other details and we’ll help you figure out the rest. When you’re ready to start saving, Itrust offers traditional and Roth IRAs, as well as SEP IRAs and rollover IRAs so you can save for retirement on your own terms. 

Ask : Should I Invest My Down Payment?

Welcome to our Ask series, where we tackle your questions about personal finance and investing. Want to see your question answered here? Reach out to us on social media and we’ll try to address it in a future column. 

I’m saving for a house. Should I invest my down payment or keep it in cash?

As you decide whether to invest your down payment or keep it in cash, you’re primarily making a decision about risk. Investing, by definition, involves some risk—but that’s why it can offer higher expected returns over the long run. Cash is very low risk, but it is likely to offer lower expected returns.

In this post, we’ll give you a framework for thinking about risk in the context of your down payment so you can decide what’s right for you. We’ll highlight the tradeoffs related to three options you might consider: 

  1. Keeping your down payment in cash
  2. Investing your down payment in a low-risk investment like US Treasuries
  3. Investing your down payment in a diversified portfolio

The argument for keeping your down payment in cash

Keeping your down payment in cash is a great option if you expect to buy a home imminently or if you are unwilling or unable to take any risk to your principal. If you keep your down payment in a savings account or high-yield cash account, you’ll have a high degree of certainty that your money will be there when you need it. However, you’ll be making a tradeoff when it comes to expected returns.

Over long periods of time, cash is unlikely to earn enough interest to keep up with inflation. So if you keep your down payment in cash for long enough, you could actually lose buying power. If you plan to buy a house imminently, this is unlikely to be an issue. But over longer periods of time, you could be leaving potential returns (and thus housing budget) on the table.

If you do decide to keep your down payment in cash, we suggest picking an account with a very competitive APY and adequate FDIC insurance. Many banks pay next-to nothing in interest and, as insured depository institutions, are limited to $250,000 in FDIC insurance per account holder. But the Itrust Cash Account offers an industry-leading 4.50% APY and up to $8 million in FDIC insurance ($16 million for joint accounts) through our partner banks. Plus, the Cash Account comes with no account fees and your money is readily available when you need it. By choosing a good home for your cash, you can ensure your down payment earns a competitive interest rate and is well protected in case of an unforeseen event.

The argument for investing your down payment in a low-risk investment like US Treasuries

While holding cash can feel psychologically rewarding, it could make more sense to invest your down payment in a low-risk investment like US Treasuries. While they have a lower expected long-term return than a diversified portfolio of US equities, US Treasuries can offer a steady yield until maturity and the interest you earn is exempt from state and local income taxes. At the same time, US Treasuries are backed by the full faith and credit of the US government, which is why they are considered among the safest investments in the world. If held to maturity, US Treasuries pose virtually no risk to your principal, although you run the risk of losing some principal if you sell before then (if interest rates go up, the price of the bond may decrease). 

Because of these benefits, US Treasuries can be a very attractive and low-risk way to invest your down payment whether you’re buying a home in a few months or a few years. You could argue that US Treasuries are the sweet spot between holding your down payment in cash and investing it in a diversified portfolio. And if you want to minimize the risk associated with interest rate fluctuations, you could consider building a US Treasury ladder (a type of bond ladder) with US Treasuries of varying maturities. 

At Itrust, we built our Automated Bond Ladder (a ladder of US Treasuries) to make it easy to benefit from a bond ladder strategy without any of the hassle it normally entails for a low annual advisory fee of 0.25%. The Automated Bond Ladder can be a great way to invest your down payment if you want to keep your level of risk very low and take advantage of state income tax exemptions, and it comes with up to $500,000 of SIPC insurance. When you’re ready to buy a home, your ladder is very liquid and there are no early withdrawal penalties. You can even set a target withdrawal date for your Automated Bond Ladder, which can be useful if you have a timeline you’re fairly confident in.

The argument for investing your down payment in a diversified portfolio

Finally, if your time horizon for buying a home is five or more years away, you might consider keeping your down payment in a diversified portfolio of low-cost index funds. It’s true that this type of portfolio (like Itrust’s Classic portfolio) comes with more risk than cash or US Treasuries, but that risk could also get you higher expected returns over the long run. There’s also a well established relationship between risk and time horizon, and the longer you stay invested, the lower your probability of loss. 

As you get closer to actually buying a home, it could be wise to shift your down payment from a diversified portfolio to one of the lower-risk options discussed above. The reason for this? Financial markets are unpredictable in the short term and can be volatile. It would be unfortunate if the market declined steeply at the exact time you needed to liquidate your investments to purchase a home—you could end up with a smaller down payment than you’d hoped for, and you’d also be selling investments when they’re down (which is nice to avoid if you can).

Key takeaways: Should you invest your down payment?

There’s no one-size-fits-all answer to whether or not you should invest your down payment, but there are some rules of thumb to keep in mind:

  • If you plan to buy a house imminently, it probably makes sense to keep your down payment in cash.
  • If you plan to buy a house soon (a few months to a few years from now) and want to earn a higher yield with very little risk, consider investing in US Treasuries.
  • If you’re at least five years away from buying a home and are willing to take on additional risk in order to potentially grow your down payment, a diversified portfolio of index funds could be a good fit.

It’s also an option to split your down payment if you believe you can benefit from a variety of approaches—you don’t have to keep all of it in one place. For instance, you could keep half of your down payment in cash and the other half in a diversified portfolio of low-cost index funds if you wanted to balance out a higher-risk option with the lowest risk option. 

We hope this helps!

Our Thoughts on Investing in Cryptocurrency

Note: As of March 21, 2024, Itrust uses the iShares Bitcoin Trust (IBIT) to represent the Bitcoin asset class instead of the Grayscale Bitcoin Trust (GBTC). As of September 9, 2024, Itrust uses the iShares Ethereum Trust (ETHA) to represent the Ethereum asset class instead of the Grayscale Ethereum Trust (ETHE). Read more here.

Earlier this summer, we began supporting cryptocurrency exposure in Itrust portfolios. We’re very excited about this, and we’re proud to offer clients so many choices in building their ideal portfolio. We also take seriously our role as a fiduciary, and we want to offer some guidance to anyone who is considering investing in cryptocurrency — either at Itrust or elsewhere.

One of the most important things to understand about cryptocurrency as an investment is that it’s highly volatile — this means it can either gain or lose a significant amount of value in a short period of time. For example, Bitcoin, the largest digital currency by market capitalization, has a price history marked by large rallies and crashes, and in the last 12 months it has traded as high as $64,863.10 and as low as $9,916.49. On May 19, over the course of a single day, Bitcoin’s value fell 30%. It’s true that many people have profited handsomely from investing in digital currencies, but it’s not for the faint of heart. 

Because of this volatility, we consider investments in cryptocurrency risky. This includes the Grayscale statutory trusts GBTC and ETHE, which we offer on our platform. These trusts allow investors to get exposure to cryptocurrency without owning coins directly, but introduce another variable: potential tracking error which can cause the price of a share of the trust to differ from the value of the underlying asset.

We don’t say all of this to scare you away from investing in cryptocurrency. We’re proponents of financial innovation and believers in the power of software — and as a result, we’re excited about digital currencies. We know many of our clients are equally excited, so we want to give you a framework for thinking about these investments. Our advice is this: if you’re going to invest in cryptocurrency, we think you should have an investment thesis. 

An investment thesis is a logical argument for why an investment will increase in value over time. Often, an investment thesis will evaluate an investment’s cash flow, but that isn’t possible in the case of cryptocurrency. Instead, a successful investment thesis for cryptocurrency should draw on research and analysis of its characteristics and future economic events. For example, Fidelity’s investment thesis for Bitcoin references the asset’s fixed supply and a number of factors that could drive an increase in Bitcoin demand including deglobalization and the transfer of wealth to millennials. Whether or not you agree with these specific reasons for investing in cryptocurrency, this is the kind of logic we encourage you to use.

Unfortunately, some of the most common reasons for wanting to invest in cryptocurrency don’t make great investment theses. Many people want to invest in cryptocurrency because it has performed well in the past — but this doesn’t necessarily mean it will continue to do so in the future. Some people might also feel pressure to invest in cryptocurrency because it seems like everyone else is doing it, but FOMO doesn’t make a good investment thesis, either.

We’re delighted to be the first investing service to allow clients to get exposure to cryptocurrency in a diversified and automated portfolio with features like tax-sensitive rebalancing and our industry-leading Tax-Loss Harvesting. We hope this advice helps you navigate the question of how to invest in cryptocurrency so you can confidently build wealth on your own terms.