Investing Basics, explained simply.

How it works

An IRA is a retirement account you set up yourself, separate from anything your employer offers. The letters stand for Individual Retirement Account, and the word "individual" is the key idea: it is yours, you control it, and it follows you no matter where you work. As a Florida public employee, you might already have an FRS pension and accounts like the FRS Investment Plan or a 403(b) or 457(b) through your job. An IRA is something you can have in addition to those, and it gives you another tax-advantaged place to save. "Tax-advantaged" simply means the government gives you a tax break to encourage you to save for retirement.

There are two main flavors, and the difference comes down to when you get your tax break: now or later. A Traditional IRA is the "pay tax later" option. The money you put in can often be deducted from your taxable income for the year, which can lower your tax bill today. Your money then grows without being taxed along the way, and you pay regular income tax only when you take it out in retirement. A Roth IRA is the "pay tax now" option. You contribute money you have already paid tax on, so there is no deduction today, but in exchange your money grows and can later be withdrawn completely tax-free in retirement (as long as you follow the rules). A simple way to remember it: Traditional means a tax break today, Roth means a tax break in retirement.

Each year the IRS sets a limit on how much you can contribute across your IRAs. The limit is a combined cap, so it applies to all your IRAs added together, not to each account separately. To encourage older savers to catch up, the IRS also allows an extra "catch-up" contribution once you reach age 50. These dollar amounts change from year to year, so always confirm the current limit with the IRS or a qualified professional before you contribute. There are also income rules that can affect whether you can deduct a Traditional contribution or contribute to a Roth at all.

Because retirement accounts are meant for retirement, there is generally a penalty for taking money out too early. As a general rule, if you withdraw earnings before age 59½, you may owe regular income tax plus an additional early-withdrawal penalty on top. There are some exceptions the IRS allows, but the basic idea is that the tax benefits come with a trade: the money is meant to stay invested until you are near or in retirement. This is different from a regular savings account you can dip into anytime, so it helps to keep your emergency money somewhere else.

One reason IRAs matter so much for FRS members is that they are a very common landing spot for money you already have when you leave work. When you retire, you may have a DROP lump sum, or a balance in a 403(b) or 457(b), or an FRS Investment Plan account. These can often be "rolled over" into an IRA. A rollover means moving retirement money from one account into another without it counting as a taxable withdrawal, as long as it is done correctly. Done properly, a rollover lets you consolidate accounts into one place you control, while keeping the tax benefits intact. The rules can be detailed, so this is a good moment to work with a qualified professional.

Finally, an important rule to know is about Required Minimum Distributions, or RMDs. Traditional IRAs are subject to RMDs once you reach the required age, currently 73, rising to 75 in 2033, while Roth IRAs are generally not subject to RMDs during the original owner's lifetime. You can learn more in the section on RMDs just below.

Why it matters for FRS members

Your FRS pension is a wonderful foundation, but for many people it was never designed to cover every expense in retirement on its own. An IRA gives you a flexible, personal account to build savings around that pension, and because you control it directly, it stays with you across job changes and into retirement. The choice between Traditional and Roth also lets you think about taxes on your own terms. IRAs are also where a great deal of FRS money naturally ends up at retirement, since a DROP lump sum, 403(b), or 457(b) can often be rolled into one place you manage. Understanding how IRAs work helps you make calmer, more informed decisions about the savings you've worked so hard to build.

Key terms

• IRA (Individual Retirement Account). A personal retirement savings account you open on your own, separate from your employer, with special tax benefits to help your money grow.
• Traditional IRA. The "tax break now" type. Contributions may lower your taxable income today, the money grows tax-deferred, and you pay income tax when you withdraw it in retirement.
• Roth IRA. The "tax break later" type. You contribute money you've already paid tax on, and qualified withdrawals in retirement are generally tax-free.
• Contribution limit & catch-up. The maximum total the IRS lets you put into your IRAs each year, with an extra "catch-up" amount once you reach age 50. These figures change yearly, confirm the current numbers with the IRS.
• Rollover. Moving retirement money from one account into another (such as a 403(b), 457(b), or DROP lump sum into an IRA) without it counting as a taxable withdrawal, when done correctly.

Common mistakes

• Thinking an IRA is an investment itself. An IRA is the account, or container, not the investment. Inside it you still choose how the money is invested.
• Believing you can't have an IRA because you already have an FRS pension or a 403(b)/457(b). You can generally have an IRA in addition to your workplace accounts, though income rules may affect deductions or Roth eligibility.
• Treating an IRA like a regular savings account. Withdrawing earnings before age 59½ can generally trigger income tax plus an extra penalty, so keep emergency cash in a separate, accessible account.
• Cashing out a DROP lump sum, 403(b), or 457(b) instead of rolling it over. Taking the cash directly can create a large tax bill, while a properly handled rollover can move the money into an IRA without triggering that tax.

How it works

First, the why. For years, accounts like a Traditional IRA or your 403(b) let you set aside money before taxes were taken out, and that money grew without being taxed along the way. "Pre-tax" means you got a tax break going in and didn't pay tax on the growth. The IRS lets you defer those taxes, but not forever. An RMD is the IRS's way of eventually collecting. "Distribution" is just the formal word for a withdrawal. So an RMD is a withdrawal you're required to take each year so the deferred taxes finally get paid.

Which accounts have RMDs? Generally, the pre-tax (traditional) ones: a Traditional IRA, a 401(k), a 403(b) (common for teachers and school employees), a 457(b) (common for government workers), and the pre-tax balance in the FRS Investment Plan. One important account is generally exempt: a Roth IRA is not subject to RMDs during the original owner's lifetime, because you already paid the tax on that money going in. Under current rules, designated Roth accounts inside a 401(k), 403(b), or 457(b) are also no longer subject to lifetime RMDs. Note that your FRS Pension Plan, the traditional pension that pays a monthly check for life, isn't an account you withdraw from, so RMDs work differently there and are typically handled for you.

When do they start? Under current law (the SECURE 2.0 Act), RMDs generally begin at age 73, and that age is scheduled to rise to 75 starting in 2033. There's a small grace period for your very first one, you can wait until April 1 of the year after you turn 73, but be careful: if you delay that first withdrawal, you may end up taking two RMDs in the same calendar year, which can push more income onto a single year's tax return. These ages can change, so confirm the current rule with the IRS or a qualified professional.

How is the amount figured? It's simpler than it sounds. You take your account balance from December 31 of the prior year, then divide it by a number from an IRS life-expectancy table, a chart that estimates how many more years someone your age is expected to live. The older you are, the smaller that number, so the slice you must withdraw gets a little larger each year. For example, if the table says your factor is about 26 and your account held $260,000, your RMD for that year would be roughly $10,000. Your account custodian will often calculate the figure for you, but the legal responsibility to take it on time is yours.

What if you miss one? Missing an RMD used to carry a steep penalty, but SECURE 2.0 reduced it. The penalty is now generally 25% of the amount you should have withdrawn, and it can drop to 10% if you correct the mistake promptly and file the right form, far gentler than the old 50%, but still worth avoiding. The fix is usually to withdraw the missed amount as soon as you notice and ask the IRS to waive the penalty for reasonable cause.

Why it matters for FRS members

RMDs usually aren't your whole retirement picture, but they can quietly reshape your tax bill in your 70s. Many FRS members reach retirement with a pension (or a DROP payout), Social Security, and one or more savings accounts like a 403(b), 457(b), or the pre-tax FRS Investment Plan balance. Once RMDs kick in, those required withdrawals stack on top of your pension and Social Security as taxable income, and a larger income can sometimes affect other things, such as how much of your Social Security is taxed or what you pay for Medicare. Florida has no state income tax, which is a genuine break, but RMDs are still federally taxable.

The good news is that the years between retiring and age 73 are often a planning window. If your income dips in those years, that can be a lower-tax season to consider strategies like a Roth conversion, moving money from a pre-tax account into a Roth and paying the tax now, in a low-income year, so future growth and withdrawals can be tax-free and free of RMDs. Whether any of this fits you depends on your full situation, so a fiduciary adviser and a tax professional can help you map your own numbers. (See our retirement income planning page for how these pieces fit together.)

Key terms

• Required Minimum Distribution (RMD). The minimum amount the IRS requires you to withdraw each year from most pre-tax retirement accounts once you reach the required age, so previously deferred taxes get paid.
• Pre-tax (tax-deferred) account. An account such as a Traditional IRA, 401(k), 403(b), or 457(b) where you got a tax break going in, so withdrawals are generally taxable later.
• Roth conversion. Moving money from a pre-tax account into a Roth and paying the tax now, often considered in lower-income years to potentially reduce future RMDs and taxes.
• SECURE 2.0 Act. A 2022 federal law that raised the RMD starting age to 73 (rising to 75 in 2033) and reduced the penalty for a missed RMD.

Common mistakes

• Assuming RMDs apply to every retirement account. A Roth IRA generally has no RMDs during the owner's lifetime, and designated Roth accounts in workplace plans are no longer subject to lifetime RMDs under current rules.
• Thinking the custodian is responsible for taking the withdrawal. The company may calculate the figure, but the legal duty to actually take the RMD on time rests with you.
• Delaying that first RMD without realizing it can mean taking two in one calendar year, bunching more taxable income into a single year.
• Treating quoted ages, penalties, and dollar examples as permanent. These rules change, so confirm the current numbers with the IRS or a qualified professional.

How it works

Start with the problem an ETF solves. If you wanted to own a piece of 500 different companies on your own, you'd have to buy each one separately, a lot of money, time, and paperwork. An ETF does that bundling for you. It's a single fund (a pool of money from many investors) that holds a basket of many investments inside it, and you buy one share of that basket. When you own one share of the ETF, you indirectly own a tiny slice of everything in the basket.

The basket usually holds many things at once, and that's where the word diversification comes in, not putting all your eggs in one basket, by spreading your money across many investments so one bad apple doesn't sink everything. If an ETF holds hundreds of companies and one has a terrible year, that company is only a small part of the whole basket, so the damage to you is cushioned. Diversification can lower the ups and downs of your account, but it does not remove risk, and it does not guarantee a profit or protect against a loss.

Many ETFs are "index" ETFs, so it helps to know what an index is. An index is just a scoreboard that tracks a slice of the market, for example, one well-known index tracks 500 large U.S. companies, and another tracks the whole U.S. stock market. An index ETF aims to track that scoreboard by holding the same investments the index holds, in roughly the same proportions. The goal isn't to beat the market by guessing winners, but to quietly match whatever that slice of the market does, minus a small fee. Because no expensive team of stock-pickers is needed, index ETFs often charge very low costs.

Now the "exchange-traded" part. A stock exchange is the marketplace where shares are bought and sold, and "intraday" means at any moment while that marketplace is open. ETFs trade on an exchange like a stock, so their price moves throughout the day and you can generally buy or sell during market hours at the going price. That's different from a traditional mutual fund (another type of basket fund), which is priced and traded only once per day, after the market closes. So a mutual fund and an ETF can hold very similar baskets. The difference is that the ETF tends to trade more like a stock during the day, often carries a low expense ratio, and is generally structured in a way that can make it more tax-efficient in a regular taxable account. That tax efficiency matters far less inside a tax-sheltered account like an IRA or the FRS Investment Plan, where growth is already shielded from yearly taxes.

Why it matters for FRS members

You may have money in places like the FRS Investment Plan, a 403(b) or 457(b) at work, or an IRA. The investment menus inside these accounts are often built largely from low-cost index funds, and, in accounts like IRAs, ETFs, so understanding what an ETF is helps you read your own menu with confidence instead of guessing. Knowing that an ETF is a diversified basket, and that its expense ratio is a yearly cost quietly subtracted from your returns, helps you understand why even small differences in cost may add up over a long career and a long retirement. This is general education to help you ask better questions, not a recommendation to buy or sell any particular fund.

Key terms

• ETF (exchange-traded fund). A single fund that holds a basket of many investments and trades on a stock exchange throughout the day. Buying one share gives you a small slice of everything in the basket.
• Diversification. Spreading your money across many investments so one bad performer doesn't sink everything. It can soften the ups and downs but doesn't guarantee a profit or protect against loss.
• Index. A scoreboard that measures a slice of the market, such as a group of large U.S. companies. An "index ETF" aims to track that scoreboard rather than try to beat it.
• Expense ratio. The yearly cost of owning a fund, shown as a small percentage quietly subtracted from returns. A 0.10% expense ratio is about $1 per year for every $1,000 invested. Index ETFs often have low expense ratios.
• Mutual fund. Another type of basket fund, but priced and traded only once per day after the market closes, rather than throughout the day like an ETF.

Common mistakes

• Thinking an ETF is a single company's stock. One ETF share usually represents a small piece of many investments at once, the whole point of the basket.
• Believing diversification removes risk. Spreading out can reduce some bumps, but every investment can still lose value; diversification can't guarantee gains or prevent losses.
• Ignoring the expense ratio because it looks tiny. A fraction of a percent each year may seem like nothing, but over decades it's a cost that quietly compounds.
• Assuming "index" means safe or guaranteed. An index ETF simply aims to track a slice of the market. If that slice falls, the ETF generally falls with it.
• Chasing past performance. A fund that did well recently may or may not do well next; historical results are not a promise of future returns.

How it works

Here's the basic idea. When you buy a bond, you're lending your money to whoever issued it (the borrower), usually a government or a company. In return, the issuer makes you two promises. First, they'll pay you interest along the way, usually twice a year; that interest payment is called the coupon. Second, on a specific future date, the maturity date, they'll return the original amount you lent, called the principal or face value. So a simple bond is just: lend money now, collect interest payments for a while, then get your lump sum back at the end.

A quick example with round numbers. Imagine you buy a bond with a $1,000 face value and a 4% coupon that matures in 10 years. Each year you'd generally receive about $40 in interest (4% of $1,000), often split into two $20 payments. After 10 years, the issuer aims to return your $1,000. The word "yield" comes up a lot too; in plain terms, yield is the return you actually earn for the price you paid. If you pay exactly $1,000, your yield and coupon are the same. If you pay more or less than $1,000 (which happens when you buy a bond someone else already owns), your yield will differ a little from the stated coupon.

There are three main types you'll hear about. U.S. Treasuries are loans to the federal government; because they're backed by the full faith and credit of the U.S. government, they're widely viewed as having very low credit risk (though their prices can still move). Municipal bonds, or "munis," are loans to state and local governments, think a county building a new school. A notable feature is that the interest from many munis can be free of federal income tax, and sometimes state tax, though there are exceptions. Corporate bonds are loans to companies; because a company can run into trouble more easily than the federal government, corporate bonds generally pay higher interest to make up for that added risk.

Now the part that confuses almost everyone: bond prices and interest rates move in opposite directions, like a seesaw. When interest rates in the economy go up, the price of bonds people already own generally goes down, and when rates fall, existing bond prices generally rise. Why? Picture owning a bond paying 3%. If brand-new bonds start paying 5%, no one wants to buy your 3% bond at full price, so to sell yours, you'd have to lower the price. The flip side is also true. One key point that calms a lot of nerves: if you simply hold a bond until maturity and the issuer pays as promised, these day-to-day price swings generally don't change the interest you collect or the face value you're scheduled to get back. The price movement mainly matters if you need to sell before maturity.

Why hold bonds at all? Two big reasons. The first is income, those steady coupon payments can provide a predictable stream of cash, which many people value, especially near retirement. The second is stability, often called "ballast." Just as ballast keeps a ship steady in rough water, bonds have historically tended to be calmer than stocks and sometimes hold up when stocks are falling. Mixing some bonds with stocks can smooth out the bumps in a portfolio, which can make it easier to stay invested during scary markets instead of panic-selling at the worst time.

Bonds are not risk-free, and it helps to know the three main risks in plain terms. Interest-rate risk is the seesaw effect: if rates rise, the resale value of bonds you already own generally falls, and longer-term bonds typically react more strongly than shorter-term ones. Credit risk (or default risk) is the chance the borrower can't make its promised payments, very low for U.S. Treasuries, higher for shakier companies. Inflation risk is the quiet one: if prices in the economy rise faster than your bond's interest, the money you get back may buy less than it does today.

Why it matters for FRS members

You likely already have something that behaves a lot like a bond: your FRS pension, which is designed to send you a steady, predictable check. Understanding how bonds work helps you see your whole picture more clearly, because that pension income may already cover part of what bonds typically provide, steady, lower-volatility income. That awareness can shape how you think about the other accounts you control, such as the FRS Investment Plan, a 403(b) or 457(b), or an IRA, where you often choose among stock funds and bond funds yourself.

Knowing the basics also helps you read your own statements without anxiety. If you see the value of a bond fund dip in a year when interest rates rose, you'll understand the seesaw at work rather than assuming something is broken. None of this is a recommendation to buy or sell anything, how much, if any, of your money belongs in bonds depends on your goals, timeline, pension, and comfort with ups and downs. A fiduciary adviser can help you weigh those personal factors. (See retirement income planning.)

Key terms

• Bond. A loan you make to a government or company; in return they generally pay you periodic interest and aim to return your original amount on a set date.
• Coupon. The interest payment a bond makes to you, usually paid twice a year. A 4% coupon on a $1,000 bond generally means about $40 of interest per year.
• Principal (face value). The original amount of the loan that the issuer is scheduled to return to you when the bond matures.
• Maturity date. The future date when the issuer is scheduled to pay back the bond's face value and the loan ends.
• Yield. The return you actually earn based on the price you paid, which can differ from the stated coupon if you paid more or less than face value.

Common mistakes

• Believing bonds are completely safe or can't lose value. Many bonds carry lower risk than stocks, but their resale prices still move, and selling before maturity can mean getting back more or less than you paid.
• Confusing the coupon with the yield. The coupon is the fixed interest the bond pays; the yield reflects your actual return given the price you paid.
• Panicking when a bond fund's value drops as rates rise. This is the normal seesaw relationship, not a sign of failure, and the swing mainly matters if you need to sell early.
• Assuming all bonds are basically the same. A U.S. Treasury, a municipal bond, and a bond from a shaky company can carry very different credit risk and tax treatment.
• Forgetting about inflation. Even when a bond pays as promised, rising prices can quietly reduce what your future dollars will actually buy.