An IRA is a tax-advantaged savings account you open yourself to save for retirement

An IRA (Individual Retirement Account) is a savings account designed specifically for retirement. You open it at a bank, brokerage, or credit union—not through an employer. The account lets you set aside money and invest it, and the money grows tax-free or tax-deferred depending on which type of IRA you choose. The main advantage is that you pay less in taxes on the money you save and the earnings it generates.

Unlike a 401(k), which your employer sets up and often contributes to, an IRA is entirely your responsibility. You decide how much to contribute each year (within legal limits), you choose where to open it, and you decide how to invest the money inside it. The tradeoff is that you cannot touch the money penalty-free until age 59½ in most cases—the account is meant to stay locked until retirement.

Key Takeaways

  • An IRA is a personal retirement savings account you open yourself, separate from any employer plan, and contributions may reduce your taxable income.
  • The two main types are Traditional IRA (contributions may be tax-deductible now, taxes paid when you withdraw) and Roth IRA (contributions not deductible, but withdrawals in retirement are tax-free).
  • You can contribute up to $7,000 per year (or $8,000 if you are 50 or older), but the exact amount you can deduct depends on your income and whether you have an employer plan.
  • Withdrawals before age 59½ usually trigger a 10% penalty plus income tax, with limited exceptions for hardship, first-time home purchase, or education expenses.
  • You must start taking withdrawals at age 73 (for Traditional IRAs), but Roth IRAs have no required withdrawal age during your lifetime.

Traditional IRA vs. Roth IRA: The core difference

A Traditional IRA lets you deduct your contributions from your income taxes in the year you make them—if you meet income requirements. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount, including all the growth. This works well if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA works the opposite way. You contribute money that has already been taxed (no deduction now), but the money grows tax-free and you withdraw it tax-free in retirement. This works well if you expect to be in a higher tax bracket later, or if you simply want to lock in today's tax rate. Roth IRAs also have no required withdrawals during your lifetime, which makes them useful for leaving money to heirs.

The choice between them depends on your current income, your expected retirement income, and how long you plan to keep the money invested. Many people use both types at different times in their career.

Contribution limits and income restrictions

For 2024, you can contribute up to $7,000 per year to an IRA (either type, combined). 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 change yearly and are set by the IRS.

For a Traditional IRA, the amount you can actually deduct from your taxes depends on your income and whether you (or your spouse) have access to an employer retirement plan like a 401(k). If you earn above a certain threshold and have an employer plan, your deduction phases out or disappears entirely. The income limits vary by filing status and change each year.

For a Roth IRA, there are income limits that determine whether you can contribute at all. If your income exceeds the limit for your filing status, you cannot contribute directly to a Roth. However, a strategy called a "backdoor Roth" allows higher-income earners to convert a Traditional IRA into a Roth, though this has tax implications you should understand before attempting it.

How to open an IRA and where to hold it

You can open an IRA at most banks, credit unions, and investment brokerages. Common providers include Fidelity, Vanguard, Charles Schwab, and your own bank. The process is straightforward: you fill out an application (usually online), provide your Social Security number and basic information, and fund the account by transferring money from your checking account.

Once the account is open, you decide what to invest the money in. If you open an IRA at a bank, your options might be limited to savings accounts or CDs. If you open one at a brokerage, you can buy stocks, bonds, mutual funds, or exchange-traded funds (ETFs). The type of investments available depends on where you open the account, so consider what investment options matter to you before choosing a provider.

You can open an IRA at any time during the year, but contributions for a given tax year must be made by the tax filing deadline (usually April 15 of the following year). For example, you can contribute to your 2024 IRA until April 15, 2025.

Withdrawal rules and penalties

The core rule is simple: you cannot withdraw money from an IRA before age 59½ without paying a 10% penalty plus income tax on the amount withdrawn. This penalty exists to discourage early withdrawal and protect the account's purpose as a retirement fund.

There are exceptions. You can withdraw without penalty for a first-time home purchase (up to $10,000 lifetime), may have access to education expenses, medical expenses above a certain threshold, or if you become disabled. You can also withdraw to pay for health insurance if you are unemployed. These exceptions have specific rules and documentation requirements, so verify the details with your IRA provider before withdrawing.

For Traditional IRAs, you must begin taking withdrawals at age 73 (this changed from age 72 in 2023). The IRS calculates a minimum amount you must withdraw each year based on your age and account balance. If you do not take the required amount, you face a 25% penalty on the shortfall (or 10% if corrected within two years). Roth IRAs have no required withdrawal age during your lifetime, which is one reason some people prefer them.

IRA vs. employer retirement plans: When to use each

If your employer offers a 401(k), 403(b), or similar plan, you should usually contribute to that first—especially if your employer matches your contributions. An employer match is assistance programs and should be your priority. After you have captured the full match, an IRA often becomes the next logical step because IRAs typically offer lower fees and more investment choices than employer plans.

If you are self-employed or have freelance income, you cannot use a traditional IRA to shelter that income. Instead, you would use a SEP IRA or Solo 401(k), which allow much higher contributions. A regular IRA is designed for people with W-2 employment income or no earned income (such as a spouse with no job).

Some people max out both: they contribute to their employer plan up to the match, then contribute the maximum to an IRA, then contribute additional money back to the employer plan if they want to save more. The order matters for tax purposes, so consider consulting a tax professional if you have multiple income sources.

Frequently Asked Questions

Can I have both a Traditional IRA and a Roth IRA?

Yes, you can have both at the same time. However, your total contributions to all IRAs combined cannot exceed the annual limit ($7,000 in 2024, or $8,000 if 50 or older). If you contribute $4,000 to a Traditional IRA, you can only contribute $3,000 to a Roth that year.

What happens to my IRA if I change jobs?

Your IRA is separate from your employer, so it stays with you regardless of job changes. If your new employer offers a 401(k), you can keep your IRA open and contribute to both. You can also roll over money from an old employer 401(k) into an IRA, which often gives you more investment options and lower fees.

Can I withdraw money from my IRA to pay off debt?

You can withdraw money, but you will owe a 10% penalty plus income tax on the amount unless you may have access to for an exception. Paying off debt is not an exception, so this is usually an expensive way to borrow. Consider other options first, such as a personal loan or negotiating with creditors.

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

Yes. If you contribute to a Traditional IRA and deduct the contribution, you report it on your tax return. If you have a Roth IRA, you do not deduct contributions, but you still report the account to the IRS. Your IRA provider sends you a Form 5498 each year showing your contributions and account value.

What if I inherit an IRA from someone else?

Inherited IRAs have special rules that depend on your relationship to the person who died and the type of IRA. Spouses can treat an inherited IRA as their own. Non-spouse beneficiaries must withdraw the money within a set timeframe (usually 10 years) and pay income tax on withdrawals. The rules changed in 2023, so consult a tax professional if you inherit an IRA.