An IRA is a tax-advantaged account you open at a bank, brokerage, or credit union to save for retirement
IRA stands for Individual Retirement Account. It is a savings account with special tax rules that the federal government created to encourage people to set money aside for retirement. You open an IRA yourself — you do not need an employer to offer one — and you choose where to open it: a bank, an investment brokerage, a credit union, or an insurance company. The account holds cash, stocks, bonds, mutual funds, or other investments you pick.
The main reason people use IRAs is the tax break. Money you put into certain IRAs reduces your taxable income for that year, and the money inside grows without being taxed each year. You pay taxes only when you withdraw the money in retirement. This means your savings can compound faster than in a regular savings account.
You can open an IRA at any age as long as you have earned income — money from a job or self-employment. There is no upper age limit to open one, though the rules for withdrawals and contributions change once you reach certain ages.
Key Takeaways
- An IRA is a retirement savings account you open yourself, not through an employer, and the money inside grows without annual taxes.
- Contributions to a traditional IRA may reduce your taxable income in the year you make them, but you pay taxes on withdrawals in retirement.
- A Roth IRA works the opposite way: you contribute after-tax money, but withdrawals in retirement are tax-free.
- You can contribute to an IRA only if you have earned income from work, and contribution limits change each year and depend on your age.
- IRAs have strict rules about when you can withdraw money without penalty; early withdrawals before age 59½ usually cost you 10 percent plus taxes.
Traditional IRA versus Roth IRA: the two main types
The two most common IRAs are traditional and Roth, and they work in opposite directions on taxes. A traditional IRA lets you deduct your contribution from your income taxes in the year you make it, which lowers your tax bill immediately. The money grows tax-free inside the account, but when you withdraw it in retirement, you pay income tax on the full amount. This works well if you expect to be in a lower tax bracket in retirement than you are now.
A Roth IRA takes the opposite approach. You contribute money that has already been taxed — it does not reduce your current tax bill. But the money grows tax-free inside the account, and when you withdraw it in retirement, you owe no taxes at all. 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 and avoid surprises in retirement.
Both types have the same contribution limits and the same early-withdrawal penalties. The choice between them depends on whether you want a tax break now (traditional) or in retirement (Roth).
Contribution limits and who can contribute
You can contribute to an IRA only if you have earned income — wages from a job, self-employment income, or taxable alimony. The contribution limit changes each year and is set by the IRS. For 2024, the limit is $7,000 per year for people under age 50, and $8,000 per year for people age 50 and older (the extra $1,000 is called a "catch-up" contribution). These limits apply to the total you put into all your IRAs combined, not per account.
You can contribute only as much as you earned that year. If you made $4,000 in income, you can contribute at most $4,000 to an IRA, even if the annual limit is higher. If you are married and one spouse did not work, the working spouse can open a spousal IRA for the non-working spouse and contribute to both accounts, up to the limit per person.
For a traditional IRA, there is no age limit on contributions. For a Roth IRA, your income must fall below certain thresholds to contribute directly; these thresholds change each year and depend on your filing status.
How withdrawals and penalties work
IRAs are designed for retirement, and the rules reflect that. You can withdraw money anytime, but if you withdraw before age 59½, you typically owe a 10 percent early-withdrawal penalty plus income tax on the amount. For a traditional IRA, you pay tax on the full withdrawal. For a Roth IRA, you pay tax and penalty only on the earnings, not on the contributions you made (since those were already taxed).
There are a few exceptions to the early-withdrawal penalty. You can withdraw without penalty for a first home purchase (up to $10,000 lifetime), certain medical expenses, health insurance premiums if you are unemployed, disability, or a few other specific situations. Even with an exception, you may still owe income tax on the withdrawal.
Once you reach age 73, you must begin taking required minimum distributions (RMDs) from a traditional IRA each year — a set amount based on your age and account balance. Roth IRAs have no RMD requirement during your lifetime, which is another reason some people prefer them.
Where to open an IRA and what it costs
You can open an IRA at most banks, credit unions, and investment brokerages. Common places include Vanguard, Fidelity, Charles Schwab, Ally Bank, and your own bank. The account itself is usually free to open. Some providers charge annual maintenance fees (often $10 to $25, sometimes waived if you maintain a minimum balance), and some charge fees when you buy or sell investments inside the account.
Shop around before opening. Compare the investment options available, the fees charged, and whether the provider offers the type of IRA you want. Many brokerages offer IRAs with no account fees and low investment costs, especially if you use low-cost index funds.
Once you open the account, 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). You then choose what to invest the money in — or you can leave it in cash if you prefer.
IRA versus 401(k): when you have both options
If your employer offers a 401(k), you might wonder whether to use that or an IRA instead. You can actually use both. A 401(k) is an employer plan; your employer sets it up and often matches part of your contribution. An IRA is your own account that you open and control yourself. The contribution limits are separate: you can contribute up to $23,500 to a 401(k) in 2024 and up to $7,000 to an IRA in the same year.
Many people contribute to a 401(k) first to capture the employer match (assistance programs), then open an IRA to save additional retirement money. Others use an IRA if their employer does not offer a 401(k), or if they are self-employed.
Frequently Asked Questions
Can I have more than one IRA?
Yes, you can open multiple IRAs at different institutions. However, your total contributions across all IRAs in a single year cannot exceed the annual limit — $7,000 (or $8,000 if you are 50 or older) in 2024. If you have a traditional IRA and a Roth IRA, the limit applies to both combined.
What happens if I withdraw money from an IRA before retirement?
You will owe a 10 percent penalty plus income tax on the withdrawal, unless you may have access to for an exception (first home purchase, medical hardship, disability, or a few others). For a Roth IRA, you can withdraw your contributions tax-free anytime, but earnings withdrawn early are taxed and penalized.
Can I move money from a 401(k) into an IRA?
Yes, this is called a rollover. When you leave a job, you can roll your 401(k) balance into a traditional IRA at a bank or brokerage. This keeps the money tax-deferred and gives you more control over investments. Work with your 401(k) plan administrator and the IRA provider to do this correctly and avoid taxes.
Do I need earned income to open an IRA?
Yes, you must have earned income from work to contribute to an IRA. Passive income like dividends or rental income does not count. The only exception is a spousal IRA, where a non-working spouse can have contributions made by the working spouse.
What is the difference between a SEP IRA and a regular IRA?
A SEP IRA is for self-employed people and small business owners; it allows much higher contributions (up to 25 percent of net self-employment income). A regular IRA (traditional or Roth) has lower limits and is for anyone with earned income. If you are self-employed, you may want to explore a SEP IRA or Solo 401(k) for higher savings capacity.