An IRA is a tax-advantaged savings account designed specifically for retirement

An IRA (Individual Retirement Account) is a bank or investment account that lets you set aside money for retirement while getting tax breaks the government offers. The tax break is the whole point: depending on which type of IRA you open, you either pay no tax on the money you put in, or you pay no tax on the money you take out later. That tax savings is what makes an IRA different from a regular savings account.

You open an IRA through a bank, credit union, brokerage firm, or investment company—not through your employer, and not through the government. The account holds whatever you decide to invest in: cash, stocks, bonds, mutual funds, or a mix. You control what goes in and what it buys. The government's only rule is that you cannot touch the money before age 59½ without paying a penalty (with rare exceptions), and you have to start taking money out at age 73.

IRAs come in two main types: Traditional and Roth. The difference is when you get the tax break—upfront or at the end. Which one makes sense depends on your income now versus what you expect in retirement.

Key Takeaways

  • An IRA is a retirement savings account that gives you a tax break, either when you deposit money or when you withdraw it in retirement.
  • You open an IRA yourself through a bank or brokerage, not through an employer or government office.
  • A Traditional IRA lets you deduct contributions from your taxes now, but you pay tax on withdrawals later.
  • A Roth IRA takes after-tax money now, but withdrawals in retirement are tax-free.
  • For 2024, you can put up to $7,000 per year into an IRA (or $8,000 if you are 50 or older).

Traditional IRA: Tax deduction now, taxes later

With a Traditional IRA, you put money in and deduct it from your taxable income that year. If you earn $60,000 and put $7,000 into a Traditional IRA, you report only $53,000 as income to the IRS. That lowers your tax bill immediately.

The catch: when you withdraw that money in retirement, you pay income tax on it then. The money grew tax-free inside the account, but the withdrawals themselves are taxed as ordinary income. This makes sense if you expect to be in a lower tax bracket in retirement than you are now—which is true for many people.

You can deduct the full amount only if you (or your spouse) do not have a workplace retirement plan like a 401(k). If you do have one, the deduction phases out once your income reaches a certain level, which varies by year. For 2024, that phase-out starts at $77,000 for single filers and $123,000 for married couples filing jointly, but you should check the current year's limits because they change.

Roth IRA: No tax break now, tax-free withdrawals later

A Roth IRA works backward. You put in money you have already paid taxes on—no deduction. But when you withdraw in retirement, that money comes out completely tax-free, including all the growth.

A Roth makes sense if you expect to be in a higher tax bracket later, or if you simply want the certainty of tax-free withdrawals. You also get more flexibility: you can withdraw your contributions (not the earnings) anytime without penalty, which makes a Roth useful as an emergency backup, though that is not its main purpose.

There is an income limit for Roth contributions. For 2024, the ability to contribute phases out starting at $146,000 for single filers and $230,000 for married couples filing jointly. Once your income exceeds those limits, you cannot contribute directly to a Roth, though there are workarounds (like a "backdoor Roth") that some people use.

How much you can put in each year

The IRS sets an annual limit on how much you can contribute to an IRA. For 2024, that limit is $7,000 per year if you are under 50, or $8,000 if you are 50 or older. That $1,000 extra for people 50+ is called a "catch-up contribution" and is meant to help people save more in their final working years.

This limit applies to your combined IRA contributions—meaning if you have both a Traditional and a Roth, your total across both cannot exceed $7,000 (or $8,000). You cannot put $7,000 in each one. The limit resets January 1 each year.

You can contribute for a given tax year until the tax filing deadline the following year, usually April 15. So you have until April 15, 2025 to contribute to your 2024 IRA, for example.

Where to open an IRA and what it costs

You open an IRA directly with a financial institution. Common choices include Vanguard, Fidelity, Charles Schwab, your local bank, or your credit union. Each one offers IRA accounts, and most charge little or nothing to open one.

Some institutions charge annual account fees (typically $0 to $25), and some charge fees based on what you invest in—for example, mutual funds have expense ratios that come out of your returns. Shop around and compare fee structures before you choose, because fees compound over decades and eat into your retirement savings.

Once your account is open, you decide what to invest the money in. If you just want it sitting safely, you can put it in a money market account or savings account within the IRA. If you want growth, you can buy stocks, bonds, or mutual funds. The institution will walk you through the options.

The rules you need to know: withdrawals and required distributions

You cannot withdraw money from an IRA before age 59½ without paying a 10% penalty on top of income tax—with a few exceptions. Those exceptions include first-time home purchases (up to $10,000 lifetime), medical expenses, disability, and a few others. Even with an exception, you still owe income tax on the withdrawal; the penalty is what you avoid.

At age 73, the IRS requires you to start taking money out. These are called Required Minimum Distributions (RMDs), and the amount is calculated based on your age and account balance. You must take at least that amount each year or face a 25% penalty on the amount you should have withdrawn (reduced to 10% if you correct it within two years). This rule applies to Traditional IRAs; Roth IRAs have no RMD requirement during the account holder's lifetime.

If you have a Traditional IRA and are still working at 73, you can delay RMDs from that account if you do not own more than 5% of the company you work for. This is called the "still-working exception," but it does not apply to IRAs you rolled over from a previous employer's plan.

IRA vs. other retirement accounts

An IRA is one tool among several. If your employer offers a 401(k) or similar plan, that is usually a better first step because employers often match contributions—that is assistance programs. Max out any employer match before opening an IRA.

Once you have captured the full match, an IRA often makes sense because you control the investments and fees tend to be lower than in employer plans. If you are self-employed, you have other options like a SEP IRA or Solo 401(k) that allow much higher contributions.

The key difference: an IRA is yours alone and moves with you between jobs. A 401(k) stays with your employer unless you roll it over. An IRA also gives you more investment choices in most cases.

Frequently Asked Questions

Can I have both a Traditional and a Roth IRA?

Yes, but your total contributions to both accounts combined cannot exceed the annual limit ($7,000 or $8,000 for 2024). You might split contributions between the two, or fund one fully and the other not at all. Some people use both strategically to manage their tax situation.

What happens to my IRA if I change jobs?

Your IRA stays yours and does not change. It is separate from any employer plan. If you have a 401(k) at your old job, you can roll that into your IRA, but the IRA itself is unaffected by job changes.

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

First-time homebuyers can withdraw up to $10,000 lifetime from a Traditional IRA penalty-free, though you still owe income tax. With a Roth, you can withdraw your contributions anytime penalty-free, and first-time buyers can also withdraw up to $10,000 in earnings penalty-free (though you still owe tax on the earnings).

What is the difference between an IRA and a brokerage account?

An IRA has tax advantages but restrictions: you cannot touch the money before 59½ without penalty, and you must follow RMD rules. A regular brokerage account has no restrictions, but you pay tax on gains and dividends every year. An IRA is for long-term retirement savings; a brokerage account is for other goals.

Do I need earned income to open an IRA?

Yes, you must have earned income (wages, self-employment income, or taxable alimony) in the year you contribute. You cannot fund an IRA with investment returns, inheritance, or other unearned income. Your contribution limit cannot exceed your earned income for that year.