What an IRA account is and why it exists

An IRA (Individual Retirement Account) is a bank or investment account designed to hold money you set aside for retirement. The account itself is just a container—like a savings account at your bank—but with tax rules attached. The IRS created IRAs to encourage people to save for retirement by offering tax breaks you don't get with a regular savings or investment account.

The money you put into an IRA can sit there, grow through interest or investment returns, and you withdraw it after you turn 59½. The tax break comes in two forms: either you deduct the money you put in from your taxes now (traditional IRA), or you pay taxes on it now and never pay taxes on the growth or withdrawals later (Roth IRA). The tradeoff is that you generally cannot touch the money before 59½ without paying a penalty, and you must start taking money out at age 73.

IRAs are separate from employer retirement plans like a 401(k). You open an IRA on your own, at a bank or brokerage firm, using your own money. An employer plan is something your company sets up and may contribute to. Many people have both.

Key Takeaways

  • An IRA is a tax-advantaged savings account for retirement that you open yourself, not through an employer.
  • A traditional IRA lets you deduct contributions from your taxes now, but you pay taxes on withdrawals later; a Roth IRA is the opposite—you pay taxes now and withdraw tax-free later.
  • You can contribute only up to a set dollar limit each year, which varies by age and income level.
  • You cannot withdraw money before age 59½ without paying a 10 percent penalty plus income tax, with limited exceptions.
  • At age 73, you must begin taking required minimum distributions, or you face a steep penalty.

Traditional IRA vs. Roth IRA: the core difference

A traditional IRA lets you deduct your contribution from your taxable income in the year you make it. If you earn $60,000 and put $7,000 into a traditional IRA, you report only $53,000 as taxable income that year. You pay no tax on the money going in or on any growth while it sits in the account. When you withdraw money in retirement, you pay income tax on the full amount—both what you put in and all the growth.

A Roth IRA works backward. You contribute money that has already been taxed. You get no tax deduction now. But the money grows tax-free, and when you withdraw it in retirement, you owe no tax—not on the original contribution, not on the growth, nothing. This is the main advantage: if you believe your tax rate will be higher in retirement, or if you want tax-free growth, a Roth makes sense.

The catch with a Roth is that you can only contribute if your income is below a certain threshold. For 2024, you cannot contribute to a Roth IRA if your modified adjusted gross income exceeds $161,000 (single) or $240,000 (married filing jointly). These limits change each year. With a traditional IRA, there is no income limit—anyone can contribute—but if you or your spouse are covered by an employer retirement plan, the tax deduction phases out at higher incomes.

How much you can contribute each year

The IRS sets an annual contribution limit for IRAs. For 2024, you can put up to $7,000 into an IRA (either traditional or Roth, or split between them). If you are 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution, for a total of $8,000.

These limits apply to the total across all IRAs you own. If you have two IRAs and contribute $4,000 to one and $3,500 to the other, you have hit your $7,000 limit. You cannot exceed it by splitting accounts. The limit changes most years—the IRS adjusts it for inflation—so check the current year's limit before you contribute.

You must have earned income to contribute. You cannot put money into an IRA if you had no income that year. If you are married and one spouse has no income, you may be able to contribute to a spousal IRA using the working spouse's income, but the total still cannot exceed the annual limit per person.

When you can withdraw money and what happens if you don't wait

The general rule is that you can withdraw money from an IRA without penalty once you turn 59½. Before that age, withdrawals are subject to a 10 percent early withdrawal penalty plus income tax on the amount withdrawn. This penalty is steep and applies on top of regular taxes, so a $10,000 early withdrawal could cost you $1,000 in penalty plus income tax.

There are exceptions. You can withdraw without the 10 percent penalty (though you still owe income tax) if you are disabled, if you have substantial medical expenses, if you are unemployed and paying for health insurance, or if you are a first-time homebuyer (up to $10,000 lifetime). You can also withdraw your Roth contributions (not the growth) anytime without penalty, since you already paid tax on them. These exceptions are narrow, and the rules vary—consult a tax professional if you think one applies to you.

At age 73, the IRS requires you to start taking money out. These are called required minimum distributions (RMDs). The amount is calculated based on your age and account balance. If you do not take the full RMD, you face a penalty of 25 percent of the shortfall (reduced to 10 percent if you correct it within two years). This rule applies to traditional IRAs and inherited IRAs, but not to Roth IRAs you opened yourself—though it does apply to inherited Roths.

Where to open an IRA and what to invest in

You can open an IRA at a bank, a brokerage firm, or an investment company. Common places include Fidelity, Vanguard, Charles Schwab, and your own bank. Each institution offers different investment options within the IRA. At a bank, you might choose a savings account or CD. At a brokerage, you can buy stocks, bonds, mutual funds, or exchange-traded funds (ETFs).

The IRA is the account type; what you invest in is up to you. You could have a Roth IRA that holds only a savings account earning interest, or a traditional IRA full of stock mutual funds. The tax advantage applies regardless of what is inside. Some investments are not allowed in IRAs—you cannot hold collectibles, life insurance, or certain other assets—but the range of what you can hold is broad.

When you open an IRA, you will choose a beneficiary—the person who inherits the account if you die. This is important because the rules for inherited IRAs are complex and have changed in recent years. Make sure your beneficiary designation is current and matches your wishes.

How IRAs fit with employer retirement plans

If your employer offers a 401(k), 403(b), or similar plan, you can have both that plan and an IRA. Many people do. The contribution limits are separate: you can contribute up to $23,500 to a 401(k) in 2024 and separately contribute up to $7,000 to an IRA in the same year.

However, if you are covered by an employer plan, the tax deduction for a traditional IRA contribution phases out at higher income levels. For 2024, if you are single and covered by a workplace plan, the deduction begins to phase out at $77,000 income and is completely gone at $87,000. If you are married and your spouse is covered, the phase-out is $123,000 to $133,000. These limits change yearly. A Roth IRA has its own income limits (mentioned earlier) that are separate from this.

If you leave a job, you can roll over the money in your employer plan into an IRA. This is called a rollover and lets you consolidate retirement savings and often access a wider range of investments. You have 60 days to complete the rollover, or the money is treated as a withdrawal and taxed. Many people use a direct rollover, where the plan administrator sends the money straight to the IRA custodian, avoiding the 60-day clock.

Frequently Asked Questions

Can I have more than one IRA?

Yes, you can have multiple IRAs—several traditional IRAs, several Roths, or a mix. However, your total contributions across all IRAs cannot exceed the annual limit. If you have three IRAs and contribute $3,000 to each, you have exceeded the $7,000 limit and will owe a penalty on the excess. Consolidating into one IRA is simpler but not required.

What happens to my IRA if I die?

Your beneficiary inherits the account. The rules for inherited IRAs changed in 2023. Generally, a spouse can treat the inherited IRA as their own or roll it into their own IRA. Non-spouse beneficiaries must withdraw the entire balance within 10 years, though they do not have to take equal annual amounts. The tax treatment depends on whether the original IRA was traditional or Roth.

Can I withdraw my contributions to a Roth IRA anytime?

Yes. You can withdraw the money you contributed (not the growth) from a Roth IRA at any age without penalty or tax, because you already paid tax on it. The growth and earnings stay locked until 59½ unless an exception applies. This flexibility is one reason people prefer Roths.

What if I contribute too much to my IRA?

Excess contributions are subject to a 6 percent penalty each year they remain in the account. You can withdraw the excess and any earnings on it before your tax filing deadline to avoid the penalty. If you discover an excess after the deadline, you may still be able to correct it, but consult a tax professional—the rules are strict.

Do I need to report my IRA on my taxes?

Yes. If you contribute to a traditional IRA and claim a deduction, you report it on your tax return. If you take distributions, you report those too. Roth contributions are not deductible, so you do not report them, but you do report any distributions. Your IRA custodian will send you a Form 1099-R for any distributions you take.