Sign In

Article

— retirement

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 an Election Year Means for Your Investments

Election years bring uncertainty, and this year’s presidential election is no exception. However, you might be surprised to learn that history shows they usually don’t have much impact on your portfolio. In this post, we’ll dig into the data.

What history tells us about investing during election years

To understand the impact of presidential election years on investments, we looked at US stock market data all the way back to 1927, using Kenneth French’s data library. First, we analyzed mean annual returns for the US stock market for all years 1927-2023 compared to election years during that period of time. 

We found that the mean annual total return for non-election years was 12.1% and the mean annual total return for election years was 11.7%. The chart below shows these returns. However, we also performed a t-test (a way of discerning whether or not results are statistically significant) and found that the difference between election year and non-election year returns was not statistically significant. In other words, US stock market total returns are pretty much the same on average whether or not it’s an election year.

 

Next, we compared average annual volatility in the US stock market in all years from 1927-2023 to see if election years are meaningfully more volatile than non-election years. We found that mean volatility in non-election years was 15% over that time period, and mean volatility in election years was 15.3%. However, once again, our t-test confirmed these differences were not statistically significant, meaning the US stock market, historically, is just about as volatile on average in an election year as it is in a non-election year. 

Finally, we compared the average maximum drawdown (or largest decline from a recent peak) in the US stock market in all years from 1927-2023. We found that the average maximum drawdown was slightly greater in non-election years at -16.0% than in election years at -14.6%. Again, however, these differences were not statistically significant. 

It’s worth noting that our analysis picked up some small differences between election years where Republican candidates won and Democratic candidates won. The US stock market had slightly higher mean returns, lower mean volatility, and smaller maximum drawdowns during years when a Republican won the presidential election. Here again, our hypothesis testing did not find evidence that any of these differences were statistically significant. Especially given the small number of total data points, the historical differences observed are small enough to be attributed to random chance. 

Even if the market does decline or become more volatile in the short term (which is always possible), it’s important to keep an eye on the long term. Risk of loss generally goes down as your investing time horizon gets longer. If you plan to be in the market for the long run, fluctuations in your account balance today could end up being blips on the radar in the future.

Should you adjust your investment strategy in an election year?

Put simply, we don’t think so. As tempting as it may be, timing the market usually doesn’t work. Any information you have that you think might impact investment performance is presumably already broadly available. This means it’s already priced in, and you’re unlikely to come out ahead. 

Instead, we suggest focusing on what you can control:

  • Managing your risk: Invest in a portfolio that is appropriate for your risk tolerance, and rebalance it over time to ensure you don’t drift too far from your target allocation. Itrust automates this process so you don’t have to think about it. 
  • Keeping your costs low: Choose low-cost index funds whenever possible, and invest with a service that charges a low management fee (Itrust’s annual fee is just 0.15%). 
  • Minimizing your taxes: Harvest losses and use them to help lower your tax bill. The process of tax-loss harvesting can be time consuming if done manually, but Itrust does this automatically and at no extra cost. 

Major events like elections can rattle investors. And while it’s true that there are some small differences in the annual returns, volatility, and maximum drawdowns observed in years when the United States elected a new president, it’s worth remembering that the number of data points is very small and the differences were not statistically significant. If you look at the big picture, these small differences in performance are ultimately not worth paying much attention to. 

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. 

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.