An IRA is a savings account the government lets you use to set money aside for retirement, with tax breaks attached

An IRA — Individual Retirement Account — is a bank or investment account you open in your own name to save for retirement. The government doesn't contribute money to it. You do. The tax break is the point: depending on which type of IRA you have, the money you put in may reduce your taxes now, or the money that grows inside it may not be taxed when you take it out later. The catch is that you generally can't touch the money before age 59½ without paying a penalty, and you have to start taking money out at age 73.

You open an IRA through a bank, brokerage, credit union, or investment company — not through your employer (that's a 401(k)). You decide how much to contribute each year, up to a limit set by the IRS. For 2024, that limit is $7,000 if you're under 50, or $8,000 if you're 50 or older. You can contribute less, or nothing in a year where you can't afford it. The money sits in the account and you decide what it buys — stocks, bonds, mutual funds, or just cash.

Key Takeaways

  • An IRA is a personal retirement savings account where you contribute your own money and get a tax advantage — either a deduction now or tax-free growth later.
  • You open an IRA at a bank, brokerage, or credit union, not through an employer, and you control how much you contribute each year up to the IRS limit.
  • The two main types are Traditional IRA (contributions may be tax-deductible now, withdrawals taxed later) and Roth IRA (contributions not deductible, but withdrawals are tax-free).
  • You cannot withdraw money before age 59½ without paying a 10% penalty plus income tax, with limited exceptions for hardship or first-time home purchase.
  • At age 73, you must start taking required minimum distributions from a Traditional IRA, but Roth IRAs have no withdrawal requirement during your lifetime.

Traditional IRA vs. Roth IRA: The main difference

The two most common types of IRA work in opposite directions. With a Traditional IRA, you may deduct your contribution from your income taxes in the year you make it — meaning if you earn $60,000 and contribute $7,000, you might only owe taxes on $53,000. The money grows tax-free inside the account. But when you withdraw it in retirement, you pay income tax on the full amount you take out, including all the growth.

With a Roth IRA, you contribute money that has already been taxed. You don't get a deduction now. But the money grows tax-free inside the account, and when you withdraw it in retirement, you owe no tax — not on the original contribution, not on the growth. This is the opposite of a Traditional IRA. Which one makes sense depends on whether you think your tax rate will be higher or lower in retirement than it is now.

There are income limits for Roth IRAs — if you earn above a certain amount, you cannot contribute to one. Traditional IRAs have no income limit, but if you're covered by a workplace retirement plan and earn above a threshold, your deduction may be reduced or eliminated. For 2024, the Roth income limits start at $146,000 for single filers and $230,000 for married couples filing jointly, but these change each year.

How much you can contribute and when

The IRS sets an annual contribution limit. For 2024, you can put in up to $7,000 per year if you're under 50, or $8,000 if you're 50 or older (the extra $1,000 is called a "catch-up" contribution). This limit applies to the total of all your IRAs combined — if you have both a Traditional and a Roth, your contributions to both cannot exceed the limit in a single year.

You can contribute at any time during the year, or even after the year ends. Contributions for tax year 2024 can be made until April 15, 2025 (the tax filing deadline). If you don't have earned income in a year, you cannot contribute to an IRA that year — the account is meant for people who work and earn wages or self-employment income.

You don't have to contribute the maximum. You can contribute $2,000 one year and $5,000 the next. You can skip a year entirely. There's no penalty for contributing less than the limit or for not contributing at all.

What happens if you withdraw money before retirement

If you take money out of an IRA before age 59½, you generally owe a 10% early withdrawal penalty plus income tax on the amount withdrawn. This applies to both Traditional and Roth IRAs, though the rules are slightly different for each. For a Traditional IRA, you pay tax on the full withdrawal. For a Roth IRA, you can withdraw your contributions (the money you put in) tax-free and penalty-free at any time, but withdrawing the earnings (the growth) before 59½ triggers the penalty and tax.

There are exceptions. You can withdraw without the 10% penalty (though you may still owe income tax) if you use the money for a first-time home purchase (up to $10,000 lifetime), to pay for medical expenses that exceed 7.5% of your adjusted gross income, to pay health insurance premiums while unemployed, or for certain education expenses. You can also withdraw penalty-free if you become disabled or if the withdrawal is part of a series of equal payments over your life expectancy.

These exceptions are narrow and have specific rules. Before withdrawing early, contact the bank or brokerage holding your IRA to understand exactly what you owe and whether an exception applies to your situation.

Required withdrawals and age 73

With a Traditional IRA, you must start taking money out at age 73. These are called required minimum distributions (RMDs). The IRS calculates how much you must withdraw each year based on your age and account balance. If you don't take out the required amount, you owe a penalty of 25% of the shortfall (reduced to 10% if you correct it within two years).

Roth IRAs have no required withdrawal during your lifetime. You can leave the money in the account to grow as long as you live. This makes Roth IRAs useful if you don't need the money in retirement and want to pass it to heirs.

If you have multiple IRAs, you calculate the RMD for each one separately, but you can withdraw the total from one account if you choose. Your bank or brokerage will usually calculate the RMD for you and send you a notice each year.

How to open an IRA and where

You can open an IRA at most banks, credit unions, and investment brokerages. Common places include Fidelity, Vanguard, Charles Schwab, E-Trade, your local bank, or your credit union. There is no single "IRA" — it's a type of account, and different institutions offer them with different features and investment options.

To open one, you'll need to provide your Social Security number, date of birth, and address. You'll choose whether you want a Traditional or Roth IRA. You'll decide what the money will invest in — some people choose a single mutual fund, others pick individual stocks or bonds, and some keep it in a money market fund or savings account earning interest. If you don't know what to choose, many brokerages offer target-date funds that automatically adjust as you get closer to retirement.

There is no fee to open an IRA, though some institutions charge annual maintenance fees or fees for certain types of investments. Shop around — fees vary widely, and a low-cost provider can save you thousands over decades.

IRAs and taxes: what you need to know

The tax treatment of an IRA depends on the type. For a Traditional IRA, contributions may be tax-deductible in the year you make them, which lowers your taxable income. When you file your tax return, you report the contribution on Form 1040 or Schedule 1. If you're not covered by a workplace retirement plan, your contribution is fully deductible. If you are covered by a plan (like a 401(k)), your deduction phases out above a certain income level.

For a Roth IRA, contributions are not deductible. You pay taxes on the money before it goes into the account. But the growth inside the account is never taxed, and withdrawals in retirement are tax-free. This makes Roth IRAs valuable if you expect to be in a higher tax bracket in retirement, or if you want to minimize taxes on investment gains.

When you withdraw money, your bank or brokerage will send you a Form 1099-R showing the amount. You report this on your tax return. For Traditional IRAs, the full withdrawal is taxable as income. For Roth IRAs, only the earnings portion is taxable (and only if you withdraw before age 59½ and don't meet an exception).

Frequently Asked Questions

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

Yes, but your total contributions to both cannot exceed the annual limit. If you contribute $4,000 to a Traditional IRA, you can only contribute $3,000 to a Roth that year (assuming the $7,000 limit for 2024). You can split your contributions however you want between the two, as long as the total doesn't exceed the limit.

What happens to my IRA if I die?

Your IRA passes to whoever you named as the beneficiary on the account. They can inherit it as a lump sum, take distributions over time, or in some cases stretch the withdrawals over their lifetime. The rules changed in 2023, and most non-spouse beneficiaries must now withdraw the entire account within 10 years. Name a beneficiary when you open the account, and review it every few years.

Can I roll over money from a 401(k) into an IRA?

Yes. When you leave a job, you can roll over your 401(k) balance into a Traditional IRA without paying taxes or penalties, as long as you do it within 60 days or use a direct transfer. This is called a "rollover." A Roth conversion (moving pre-tax money into a Roth) is also possible but triggers taxes on the amount converted. Talk to your former employer's plan administrator about the rollover process.

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

If your income exceeds the limit, you cannot contribute directly to a Roth. However, you may be able to do a "backdoor Roth" — contribute to a Traditional IRA and then convert it to a Roth. This strategy has tax implications and works differently depending on whether you have other pre-tax IRA balances. Consult a tax professional before attempting a backdoor Roth.

Can I withdraw my Roth IRA contributions anytime?

Yes. You can withdraw the money you contributed (not the earnings) from a Roth IRA at any age without penalty or tax. This is one advantage of a Roth — your contributions are always accessible. The earnings are locked until age 59½ unless an exception applies. Your bank or brokerage can tell you how much of your balance is contributions versus earnings.