An IRA is a tax-advantaged account you open at a bank or brokerage to save for retirement

An IRA (Individual Retirement Account) is a container for money you set aside for retirement. You open it yourself—not through an employer—and you control what happens inside it. The main benefit is tax relief: depending on which type of IRA you choose, you either pay no tax on the money you put in, or you pay no tax on the money that grows inside the account. That tax break is the entire reason IRAs exist.

You can open an IRA at almost any bank, credit union, or brokerage firm. Once it's open, you put money in (called a contribution), and that money can sit in cash, or you can use it to buy stocks, bonds, mutual funds, or other investments. The account itself is separate from your regular checking or savings account—it's a distinct legal container with its own rules about when you can take money out and how much you can put in each year.

The catch is that IRAs are meant for retirement. If you take money out before age 59½, you usually pay a 10% penalty on top of income tax. There are a few exceptions—first-time home purchase, certain medical expenses, disability—but the general rule is: money in, money stays until you're older.

Key Takeaways

  • An IRA is a personal retirement savings account that gives you a tax break on either the money you contribute or the money that grows inside it.
  • You can open an IRA at a bank, credit union, or brokerage and invest the money however you choose—or leave it in cash.
  • Withdrawals before age 59½ usually trigger a 10% penalty plus income tax, with limited exceptions for hardship.
  • The two main types are Traditional (tax deduction now, taxes on withdrawal later) and Roth (no tax deduction now, tax-free withdrawal later).
  • You can contribute a set amount each year—the limit changes annually and depends on your age.

Traditional IRA vs. Roth IRA: The two main types

A Traditional IRA lets you deduct your contributions from your income taxes in the year you make them. If you earn $60,000 and contribute $7,000 to a Traditional IRA, you report only $53,000 as taxable income that year. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount—both what you put in and everything it earned.

A Roth IRA works backward. You contribute money that you've already paid income tax on. You get no tax deduction that year. But the money grows tax-free inside the account, and when you withdraw it in retirement, you owe no tax at all—not on the growth, not on anything. This is the main advantage: tax-free withdrawals forever.

Which one makes sense depends on your situation. If you expect to be in a lower tax bracket in retirement than you are now, a Traditional IRA saves you more money overall. If you expect to be in the same bracket or higher, or if you want to lock in today's tax rates, a Roth is often better. There are also income limits for Roth contributions—if you earn above a certain threshold, you cannot contribute to a Roth directly, though there are workarounds.

How much you can contribute each year

The IRS sets an annual limit on how much you can put into an IRA. This limit changes most years. For 2024, the limit is $7,000 if you're under 50, and $8,000 if you're 50 or older (the extra $1,000 is called a catch-up contribution). For 2025, check the IRS website or your brokerage for the current year's limit.

You can contribute that amount to a Traditional IRA, a Roth IRA, or split it between both—but the total across all your IRAs cannot exceed the annual limit. If you have a spouse, they can open their own IRA and contribute the same amount. You can contribute at any time during the year, or even up until the tax filing deadline the following year (usually April 15).

If you earn very little or no income in a given year, you can only contribute up to the amount you earned. If you earned $3,000, you can contribute at most $3,000, even if the annual limit is higher.

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

You can withdraw money from your IRA anytime, but the tax consequences depend on your age and the type of account. Before age 59½, a withdrawal is taxed as income plus hit with a 10% penalty. After 59½, you can withdraw without penalty, though you still owe income tax on Traditional IRA withdrawals (Roth withdrawals are tax-free if the account has been open at least five years).

There are narrow exceptions to the early withdrawal penalty: first-time home purchase (up to $10,000 lifetime), unreimbursed medical expenses, disability, certain education costs, and a few others. The penalty is waived, but you still owe income tax on the withdrawal unless it's a Roth.

At age 73, you must begin taking money out of a Traditional IRA—these are called Required Minimum Distributions (RMDs). The IRS calculates how much based on your age and account balance. You must withdraw at least that amount each year or face a 25% penalty on the shortfall (reduced to 10% if you correct it quickly). Roth IRAs have no RMD requirement during the account holder's lifetime.

How to open an IRA and where to do it

Opening an IRA takes about 15 minutes online. Go to a bank, credit union, or brokerage—Vanguard, Fidelity, Charles Schwab, and most major banks all offer them. You'll provide your name, Social Security number, address, and employment information. You'll choose Traditional or Roth. You'll decide how much to contribute and how to invest it (or leave it in cash). Then you'll fund the account by transferring money from your bank account.

Some employers offer a SEP IRA or Solo 401(k) if you're self-employed or own a small business—these allow much higher contributions than a regular IRA. If you have a workplace 401(k) or 403(b), you can still open and contribute to an IRA, though there are income limits for deducting Traditional IRA contributions if you're already covered by a workplace plan.

You can open multiple IRAs at different institutions if you want, but your total contributions across all of them cannot exceed the annual limit. Many people keep one IRA at a brokerage where they invest in stocks or funds, and another at a bank for cash savings.

Rolling over an old 401(k) or IRA into a new IRA

If you leave a job and have a 401(k), you can move that money into an IRA—this is called a rollover. You can do a direct rollover (the 401(k) administrator sends the money straight to your new IRA) or an indirect rollover (they send it to you, and you deposit it into the IRA within 60 days). A direct rollover is simpler and avoids tax withholding.

You can also roll over money from one IRA to another IRA at a different institution. This is useful if you want to consolidate accounts or move to a brokerage with lower fees. The process is the same: direct rollover is cleanest.

If you do an indirect rollover and miss the 60-day deadline, the money is treated as a withdrawal and taxed as income plus the 10% penalty (if you're under 59½). If you're over 59½, you still owe income tax but not the penalty. Be careful with the timing.

What happens to an IRA when you die

When you pass away, your IRA goes to whoever you named as the beneficiary on the account. This bypasses your will—the beneficiary designation controls who gets the money. You can name a spouse, adult child, trust, or charity. If you don't name anyone, the account goes to your estate and may be subject to probate.

A spouse who inherits an IRA can treat it as their own and continue deferring withdrawals. Non-spouse beneficiaries must withdraw the money over a set period—the rules changed in 2023, and most non-spouse beneficiaries now must empty the account within 10 years. The withdrawals are taxed as income (except for Roth IRAs, which are tax-free).

Frequently Asked Questions

Can I have both a Traditional IRA and a Roth IRA at the same time?

Yes. You can split your annual contribution between both types, or max out one and contribute to the other. The total across both cannot exceed the annual limit. Many people use both: a Traditional IRA for immediate tax relief and a Roth for tax-free growth later.

What if I earn too much to contribute to a Roth IRA?

The IRS sets income limits for direct Roth contributions—if you exceed them, you cannot contribute directly. However, you can do a "backdoor Roth": contribute to a Traditional IRA (no income limit) and then convert it to a Roth. This is legal but has tax complications if you already have other Traditional IRAs. Consult a tax professional before attempting it.

Can I withdraw money from my IRA to buy a house?

Yes, but only once in your lifetime and only up to $10,000. This is called the first-time homebuyer exception. You must use the money within 120 days of withdrawal. You still owe income tax on the withdrawal, but not the 10% penalty. After you use the $10,000, you cannot withdraw more for another home purchase.

What if I contribute too much to my IRA in a year?

If you exceed the annual limit, you have until the tax filing deadline to withdraw the excess plus any earnings on it. If you don't, you pay a 6% penalty each year the excess sits in the account. It's better to catch and correct it quickly than to let it compound.

Do I need to report my IRA on my tax return?

You report Traditional IRA contributions as a deduction (if you're not covered by a workplace plan or if your income is below the limit). You report withdrawals as income. Roth contributions are not deductible, and may have access to withdrawals are not reported as income. Your brokerage sends you a Form 1099-R for any withdrawals, which you use when filing.