An IRA is a tax-advantaged account you open with a bank or brokerage to save for retirement
An Individual Retirement Account (IRA) is a savings account designed specifically for retirement. You fund it with your own money, choose what to invest it in (usually stocks, bonds, or mutual funds), and the account grows tax-deferred or tax-free depending on the type. The main appeal is that the government lets you reduce your taxes now or later in exchange for committing the money to retirement.
You do not need an employer to open an IRA. Anyone with earned income — from a job, self-employment, or freelance work — can open one at a bank, credit union, or brokerage like Fidelity, Vanguard, or Charles Schwab. The account is yours alone and stays with you if you change jobs.
IRAs are separate from employer retirement plans like a 401(k). Many people have both. An IRA gives you control over where your money goes and what it buys, whereas a 401(k) is managed through your employer and often includes a company match.
Key Takeaways
- An IRA is a personal retirement savings account that you open yourself and fund with your own money, with no employer involvement required.
- The two main types are Traditional IRAs, where contributions may lower your taxes now but withdrawals in retirement are taxed, and Roth IRAs, where contributions are made with after-tax money but withdrawals in retirement are tax-free.
- You can contribute up to a set annual limit (which varies by year and your age), and the money grows without being taxed on gains until you withdraw it.
- You cannot withdraw money before age 59½ without penalty in most cases, which is why an IRA is designed for long-term retirement saving rather than short-term goals.
- An IRA works alongside other retirement savings like a 401(k) or employer pension, not instead of them.
Traditional IRA versus Roth IRA: The core difference
The two main types of IRAs differ in when you get the tax break. With a Traditional IRA, you contribute money that may be tax-deductible in the year you contribute it, lowering your taxable income. The money grows without being taxed on gains. When you withdraw it in retirement, you pay income tax on the full amount you take out.
With a Roth IRA, you contribute money that has already been taxed (you do not get a deduction now). The money grows tax-free, and when you withdraw it in retirement, you owe no tax on any of it — not on your contributions and not on the growth. This makes a Roth powerful if you expect to be in a higher tax bracket later or if you want tax-free income in retirement.
Which one makes sense depends on your current tax bracket, how much you expect to earn in retirement, and how long you plan to keep the money invested. A financial advisor or tax professional can help you think through the trade-off for your situation.
How much you can contribute each year
The IRS sets an annual contribution limit for IRAs. The limit changes most years and is higher if you are age 50 or older (the "catch-up" amount lets you save more as you approach retirement). You can find the current year's limit on the IRS website or ask your bank or brokerage when you open the account.
You can contribute up to the limit across all your IRAs combined — if you have both a Traditional and a Roth, your total contributions to both cannot exceed the annual cap. You can contribute in a lump sum or spread contributions throughout the year. Many people contribute in January or wait until the tax deadline (usually April 15 of the following year) to make the previous year's contribution.
If you have no earned income in a given year, you cannot contribute to an IRA that year. The account is meant to be funded by money you actually earned.
When you can withdraw your money
IRAs are designed for retirement, so the IRS discourages early withdrawal. You can withdraw money penalty-free once you reach age 59½. If you withdraw before that age, you typically owe a 10% penalty on the amount withdrawn, plus income tax on it.
There are narrow exceptions: you can withdraw without penalty for a first-time home purchase (up to $10,000 lifetime), certain medical expenses, disability, or a few other specific hardships. A Roth IRA also lets you withdraw your contributions (not the growth) at any time without penalty, since you already paid tax on that money.
Starting at age 73, you must begin taking withdrawals from a Traditional IRA each year — these are called Required Minimum Distributions (RMDs). Roth IRAs do not require withdrawals during your lifetime, which is another reason some people prefer them.
How your money grows inside an IRA
Once you fund your IRA, you choose what to invest in. Most IRAs hold stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Some banks offer IRAs that function like savings accounts with a fixed interest rate, though the rate is usually low. The growth depends entirely on what you choose to buy and how those investments perform.
The tax advantage is that you do not pay tax on gains, dividends, or interest earned inside the account each year. In a regular taxable brokerage account, you would owe tax on those earnings annually. In an IRA, the earnings compound without that annual tax drag, which means your money can grow faster over decades.
You can buy and sell investments within your IRA without triggering a tax event. You only pay tax when you withdraw cash from the account (in a Traditional IRA) or not at all (in a Roth IRA).
IRA contribution limits and income restrictions for Roth
Anyone with earned income can contribute to a Traditional IRA, but there are income limits for getting a tax deduction if you or your spouse are covered by a workplace retirement plan like a 401(k). The limits depend on your filing status and change yearly.
Roth IRAs have income limits that prevent high earners from contributing directly. If your income exceeds the limit for your filing status, you cannot fund a Roth IRA that year. The IRS publishes these limits annually, and they vary by whether you are single, married filing jointly, or married filing separately.
Some people use a strategy called a "backdoor Roth" to work around the income limit: they contribute to a Traditional IRA (which has no income limit) and then convert it to a Roth. This is legal but involves tax considerations, so it is worth discussing with a tax professional if your income is high.
Opening an IRA and getting started
To open an IRA, choose a bank, credit union, or brokerage and visit their website or call. You will need to provide your name, Social Security number, address, and employment information. The process usually takes 10 to 15 minutes online. There is no cost to open the account.
Once the account is open, you fund it by transferring money from your bank account or by rolling over money from another retirement account (like a 401(k) from a previous job). Then you decide what to invest in. If you are unsure, many brokerages offer target-date funds — a single fund that automatically adjusts its mix of stocks and bonds as you get closer to retirement.
You can open an IRA at any time, but contributions for a given tax year must be made by the tax deadline (usually April 15) of the following year. For example, you can contribute to your 2024 IRA until April 15, 2025.
Frequently Asked Questions
Can I have more than one IRA?
Yes, you can have multiple IRAs at different banks or brokerages. However, your total contributions across all IRAs in a single year cannot exceed the annual limit. For example, if the limit is $7,000, you could split that between two IRAs, but you cannot contribute $7,000 to each one.
What happens to my IRA if I change jobs?
Your IRA is yours and does not change when you change jobs. It stays exactly where it is. If you have a 401(k) from your old employer, you can roll that money into your IRA, which consolidates your retirement savings in one place and often gives you more investment choices.
Can I withdraw money from my IRA to buy a house?
You can withdraw up to $10,000 from a Traditional or Roth IRA penalty-free for a first-time home purchase. You still owe income tax on the withdrawal from a Traditional IRA, but not from a Roth (since you already paid tax on contributions). This is a one-time lifetime limit, so use it carefully.
Do I need to report my IRA on my taxes?
Yes. If you made a deductible contribution to a Traditional IRA, you report it on your tax return to reduce your taxable income. If you made a non-deductible contribution, you report that too. Roth contributions are not deductible, but the IRS still tracks them. Your bank or brokerage sends you a form each year showing your activity.
What is the difference between an IRA and a 401(k)?
An IRA is a personal account you open yourself; a 401(k) is offered by your employer. A 401(k) often includes an employer match (assistance programs), has higher contribution limits, and may offer loans. An IRA gives you more control over investments and stays with you when you change jobs. Many people have both.