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

IRA stands for Individual Retirement Account. It is a bank or investment account you open in your own name, and the government gives you tax breaks on the money you put in or the money it earns — the exact break depends on which type of IRA you choose. The catch is that you cannot withdraw the money without penalty until you turn 59½, with a few exceptions. The benefit is that your money grows without being taxed every year the way it would in a regular savings account.

You do not need an employer to open an IRA. You can walk into a bank, credit union, or brokerage firm and open one on your own if you have earned income from a job or self-employment. The bank holds the account; you decide what to do with the money inside it — keep it in savings, invest it in stocks or bonds, or some combination.

Key Takeaways

  • An IRA is a retirement savings account you open yourself, and the government gives you tax advantages on money you put in or money it earns.
  • You can only withdraw money before age 59½ in specific situations without paying a penalty, such as for a first home purchase or medical hardship.
  • A Traditional IRA lets you deduct contributions from your taxes now, but you pay taxes when you withdraw in retirement.
  • A Roth IRA takes money after taxes now, but withdrawals in retirement are tax-free.
  • You must have earned income to open an IRA, and contribution limits change each year.

How money goes into an IRA and how it grows

You contribute money to your IRA from your own paycheck or bank account. The amount you can contribute each year has a limit set by the IRS — for 2024, that limit is $7,000 if you are under 50, and $8,000 if you are 50 or older. The limit changes most years, so check with your bank or the IRS website before you contribute.

Once the money is in the account, it can sit in a savings deposit, or you can use it to buy stocks, bonds, mutual funds, or other investments. Whatever you choose, any interest, dividends, or investment gains are not taxed each year the way they would be in a regular account. That tax deferral is the main advantage — your money compounds without the government taking a cut every year.

Traditional IRA: tax deduction now, taxes later

A Traditional IRA lets you deduct your contribution from your income taxes in the year you make it. If you earn $50,000 and contribute $7,000 to a Traditional IRA, you only report $43,000 as taxable income that year. That means you pay less in taxes right now.

The tradeoff is that when you withdraw money in retirement, you pay income tax on the full amount — both the money you put in and all the growth it earned. The IRS assumes you will be in a lower tax bracket in retirement, so you come out ahead. But if you end up with high retirement income, you may pay more tax on the withdrawal than you saved upfront.

You must start taking withdrawals at age 73 (this age changed in 2023). The IRS calls these Required Minimum Distributions, or RMDs. You cannot just leave the money sitting there forever.

Roth IRA: no tax deduction now, tax-free withdrawals later

A Roth IRA works the opposite way. You contribute money that has already been taxed — you do not get a deduction on your tax return. But when you withdraw in retirement, you pay no tax on any of it, including all the growth.

A Roth makes sense if you think you will be in a higher tax bracket in retirement, or if you want the flexibility of tax-free withdrawals. You also do not have to take Required Minimum Distributions, so you can leave the money alone if you do not need it.

There is an income limit to open a Roth. If you earn above a certain amount, you cannot contribute directly. For 2024, that limit is $146,000 for single filers and $230,000 for married couples filing jointly, but these numbers change yearly.

When you can and cannot withdraw money

The main rule is that you cannot withdraw money before age 59½ without paying a 10% penalty on top of income tax. That penalty exists to discourage you from raiding your retirement savings early.

There are exceptions. You can withdraw without penalty if you use the money for a first home purchase (up to $10,000 lifetime), to pay for medical expenses that exceed 7.5% of your income, to pay health insurance premiums while unemployed, or for a may have access to education expense. You can also withdraw if you become permanently disabled or face a financial hardship the IRS defines as an emergency.

Roth IRAs have one extra flexibility: you can always withdraw the money you contributed (not the earnings) without penalty, even before 59½. Only the growth is locked until retirement.

Who can open an IRA and what you need

You must have earned income to open an IRA. That means income from a job, self-employment, or freelance work. You cannot open one on investment income, Social Security, or unemployment benefits alone.

To open an account, you will need a Social Security number or Individual Taxpayer Identification Number, a government-issued ID, and proof of address. Your bank or brokerage will walk you through the paperwork. The whole process usually takes 15 to 30 minutes online or in person.

If you are married and one spouse does not work, the working spouse can open a Spousal IRA in the non-working spouse's name, as long as the couple files taxes jointly. This lets both spouses build retirement savings.

IRA versus employer retirement plans

An IRA is different from a 401(k) or 403(b), which are retirement plans your employer offers. With those plans, your employer may match part of what you contribute — that is assistance programs. An IRA has no employer match because you open it on your own.

However, an IRA has higher contribution limits if you are self-employed. A Solo 401(k) or SEP IRA lets self-employed people contribute much more than the standard $7,000 limit. If you have a side business or freelance income, those options may make sense.

You can have both an employer plan and an IRA at the same time. Many people do — they contribute to their employer's 401(k) to get the match, then open an IRA for additional retirement savings.

Frequently Asked Questions

Can I have more than one IRA?

Yes, you can open multiple IRAs at different banks or brokerages. However, your total contributions across all IRAs cannot exceed the annual limit — $7,000 in 2024 if you are under 50. The limit applies to all your IRAs combined, not per account.

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 leave a job with a 401(k), you can roll that money into an IRA, but your existing IRA is unaffected and continues to grow.

Can I withdraw money from a Roth IRA before 59½?

You can withdraw the money you contributed anytime without penalty. You cannot withdraw the earnings without penalty unless you meet an exception like first-time home purchase or disability. The earnings stay locked until 59½ unless one of those exceptions applies.

Do I need a lot of money to open an IRA?

No. Most banks and brokerages let you open an IRA with $0 and start contributing whatever amount you can afford. Some have a minimum first deposit of $25 to $100, but many have no minimum at all. Start with what you can and add more over time.

What is the difference between a Traditional and Roth IRA for taxes?

Traditional IRA: you deduct contributions now and pay taxes on withdrawals later. Roth IRA: you pay taxes on contributions now and withdrawals are tax-free later. Choose Traditional if you want to lower your taxes this year; choose Roth if you expect higher taxes in retirement or want tax-free withdrawals.