Are IRAs Good Investments? 7 Reasons Why They Should Be Part of Your Retirement Strategy

Are you not sure if an IRA is a good way to save for the future? You may have heard of them but desire to know if they fit your current financial state. Well, I have good news: most people who want to save money for retirement can do very well with Individual Retirement Accounts (IRAs). Let’s talk about why you should include these tax-advantaged accounts in your financial plan.

What Exactly Is an IRA?

Before we jump into the benefits, let’s clarify what an IRA actually is. An IRA isn’t an investment itself – it’s a type of account that holds investments. Think of it like a basket where you can put different types of investments (stocks, bonds, ETFs, mutual funds, etc.) that grow with special tax advantages.

There are two main types of IRAs

• Traditional IRA: Contributions may be tax-deductible now, with taxes paid when you withdraw money in retirement.
• Roth IRA: Contributions are made with after-tax dollars (no immediate tax break), but qualified withdrawals in retirement are completely tax-free.

Both have their advantages depending on your situation which I’ll explain more below.

7 Compelling Reasons Why IRAs Make Good Investments

1. Tax Advantages That Supercharge Your Growth

One of the biggest draws of IRAs is their tax treatment. With a traditional IRA, your contributions may be tax-deductible, lowering your taxable income for the year. This means Uncle Sam takes less of your money right now.

With a Roth IRA, while you don’t get an immediate tax break, your investments grow tax-free, and you pay zero taxes when you withdraw in retirement (assuming you follow the rules). This can be HUGE over time!

For example, if your marginal tax bracket is 20% and you invest $100,000 in a taxable brokerage account that earns a 12% return for 2020 years, you would end up with about $598,646. Putting that money in an IRA, on the other hand, would help it grow tax-free and reach $964,629 over time. That’s an extra $365,983 just by using a tax-advantaged account!.

2. Time Is Your Best Friend (The Magic of Compound Growth)

IRAs give your money a chance to grow through the power of compound interest. The earlier you start contributing, the more powerful this effect becomes.

This is crazy: if you start investing early, like at age 25, and then stop for 10 years, you might have more money in retirement than someone who starts investing at age 35 and puts away the same amount every year until they retire!

This happens because your early investments have more time to compound. Your earnings generate their own earnings, creating a snowball effect that’s truly magical over decades.

3. Higher Potential Returns Than Many Other Options

With an IRA, you can put your money into many different things that usually give you a better return than savings accounts or CDs. Even though there is more risk, investing for retirement usually gives you enough time to ride out market changes.

With an IRA, you can build a diversified portfolio aligned with your risk tolerance and time horizon, potentially generating returns that significantly outpace inflation – something absolutely critical for maintaining your purchasing power in retirement.

4. Flexibility to Choose Your Own Investments

Unlike employer-sponsored retirement plans that may limit your investment options, self-directed IRAs give you tremendous freedom to choose your investments. Depending on where you open your account, you could have access to:

• Individual stocks
• Bonds
• Exchange-traded funds (ETFs)
• Mutual funds
• Certificates of deposit (CDs)
• And sometimes even alternative investments

For example, Fidelity offers fractional share trading for over 7,000 U.S. stocks and ETFs, while Charles Schwab is known for its extensive lineup of index and mutual funds with low minimum investments.

5. Great Option If You Don’t Have a 401(k)

If your employer doesn’t offer a retirement plan (or you’re self-employed), an IRA becomes even more valuable. It’s basically your main tax-advantaged retirement vehicle!

For 2025, you can contribute up to $7,000 to an IRA ($8,000 if you’re 50 or older). While this is less than 401(k) contribution limits, it’s still a significant amount that can grow substantially over time.

6. Complement to Your Existing 401(k)

Already have a 401(k)? An IRA can still make sense! If you’ve maxed out your 401(k) contributions or want access to investment options beyond what your employer plan offers, an IRA provides another tax-advantaged space for your retirement savings.

Using both a 401(k) and an IRA creates “tax diversification,” giving you more flexibility in retirement. This strategy lets you control which accounts you withdraw from based on your tax situation in any given year.

7. Financial Flexibility in Retirement

Having different types of retirement accounts (like having both traditional and Roth IRAs) offers valuable flexibility when it comes time to take withdrawals. This is often called “tax diversification.”

For example, let’s say you have 50% of your retirement assets in a traditional IRA and 50% in a Roth IRA. During retirement, you could take taxable withdrawals from the traditional IRA to cover regular living expenses, while using your tax-free Roth IRA funds for large one-time expenses (like buying a car) to avoid pushing yourself into a higher tax bracket.

Which Type of IRA Is Right for You?

This is where things get personal. Your specific financial situation will determine whether a traditional IRA, Roth IRA, or both make the most sense for you.

Traditional IRA Might Be Best If:

• You believe you’ll be in a lower tax bracket in retirement than you are now
• You want to reduce your taxable income this year
• You’re eligible for deductible contributions (based on income limits if you have a workplace retirement plan)

Roth IRA Might Be Best If:

• You expect to be in a higher tax bracket in retirement
• You’re in a lower tax bracket now
• You want tax-free withdrawals in retirement
• You want more flexibility (Roth contributions can be withdrawn at any time without penalties)

Keep in mind there are income limitations for Roth IRAs. For 2025, single filers with MAGI exceeding $165,000 and joint filers exceeding $246,000 cannot contribute directly to a Roth IRA (though backdoor Roth conversions remain an option).

Best Places to Open an IRA

If you’ve decided an IRA is right for you, the next step is choosing where to open one. Here are some top providers based on my research:

For Self-Directed Investors:

1. Fidelity Investments – Offers fractional share trading, zero-expense ratio index funds, and excellent retirement resources
2. TD Ameritrade – Strong customer service and outstanding educational materials
3. Charles Schwab – Extensive lineup of low-fee funds and excellent customer service

For Hands-Off Investors:

1. Betterment – Top-rated robo-advisor with a simple setup process and reasonable fees (0.25% annual fee)
2. Vanguard Digital Advisor – Simple platform with ultra-low-cost ETFs (no more than 0.20% annual fee)
3. SoFi Automated Investing – Access to certified financial planners at no additional cost

Common Questions About IRAs

Are IRAs worth it?

Absolutely! For the vast majority of people, an IRA is worth it due to the tax advantages and decades of potential tax-deferred or tax-free growth. The difference between investing in a tax-advantaged account versus a taxable account can literally mean hundreds of thousands of dollars more for your retirement.

Can I lose money in an IRA?

Yes, you can. An IRA isn’t guaranteed to make money – the performance depends on the investments you choose. However, you can significantly reduce risk by diversifying your investments and focusing on long-term growth rather than short-term fluctuations. Historically, diversified stock market investments have provided positive returns over long time periods.

What if I need my money before retirement?

While IRAs are designed for retirement, there are ways to access funds earlier if needed:

• Roth IRA contributions (not earnings) can be withdrawn at any time without penalties
• Traditional IRA withdrawals before age 59½ typically incur a 10% penalty, but there are exceptions for first-time home purchases, higher education expenses, and certain medical costs

How much should I contribute to my IRA?

Ideally, you should contribute the maximum allowed ($7,000 for 2025, or $8,000 if you’re 50+). But don’t worry if that’s not possible! Start with whatever you can afford and increase your contributions as your income grows. Even small, regular contributions can grow significantly over time.

Getting Started With Your IRA

Opening an IRA is surprisingly simple. Here’s a quick step-by-step guide:

1. Choose between a traditional or Roth IRA based on your tax situation
2. Select a provider (brokerage firm, robo-advisor, etc.)
3. Complete the application (typically online)
4. Fund your account
5. Select your investments based on your goals and risk tolerance
6. Set up regular contributions (ideally automated)

Remember, you don’t need to have the full contribution amount to start. Many providers allow you to set up automatic contributions on whatever schedule works for your budget – weekly, biweekly, or monthly.

The Bottom Line: Are IRAs Good Investments?

When we look at the tax advantages, growth potential, investment flexibility, and retirement planning benefits, IRAs are absolutely worthwhile investments for most people. They’re one of the most powerful tools available to help you build wealth for retirement.

The key is starting early and contributing consistently. Even if you can only put away a small amount each month, the long-term benefits of tax-advantaged growth can be enormous.

I’ve personally seen how effective IRAs can be as part of a comprehensive retirement strategy. Whether you’re just starting your career or looking to maximize your retirement savings in your peak earning years, an IRA deserves serious consideration in your financial plan.

Have you started investing in an IRA yet? What’s holding you back? I’d love to hear about your experiences in the comments below!