An IRA is a tax-advantaged account you open yourself to save for retirement
An Individual Retirement Account (IRA) is a savings account the federal government created to let you set money aside for retirement with tax breaks. You open it at a bank, brokerage, or credit union—not through an employer. The money you put in can grow over decades, and depending on which type of IRA you choose, you either pay taxes now or later, but not both.
The core idea is simple: the government wants you to save for retirement, so it gives you a tax incentive to do it. That incentive takes different forms depending on whether you pick a Traditional IRA or a Roth IRA. Both let your money grow without being taxed on the gains each year, which is the main advantage over a regular savings account.
You can have an IRA whether or not you have a job with a 401(k). Many people have both. An IRA is entirely your own—if you change jobs, move, or leave an employer, the account stays with you.
Key Takeaways
- An IRA is a retirement savings account you open yourself, separate from any employer plan, and it offers tax advantages that regular savings accounts do not.
- A Traditional IRA lets you deduct contributions from your taxes now, but you pay taxes on withdrawals in retirement.
- A Roth IRA takes after-tax money now, but withdrawals in retirement are tax-free.
- You can contribute up to a set annual limit (the limit changes each year), and you cannot withdraw without penalty before age 59½ in most cases.
- An IRA holds investments like stocks, bonds, or mutual funds—the account itself is just the container; you decide what goes inside it.
Traditional IRA versus Roth IRA: The main difference
The two most common types of IRAs differ in when you pay taxes. With a Traditional IRA, you contribute money before taxes are taken out of your paycheck (or you deduct the contribution on your tax return). That money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount—both what you put in and all the growth.
With a Roth IRA, you contribute money that has already been taxed. You do not get a tax deduction now. But the money grows tax-free inside the account, and when you withdraw it in retirement, you owe no taxes at all—not on the growth, not on anything. This is the big advantage of a Roth if you expect to be in a higher tax bracket later, or if you simply want to know your withdrawals will be tax-free.
Which one makes sense depends on your income now versus what you expect in retirement, and whether you want the tax break today or later. A tax professional can help you think through this, but the key point is that one is not objectively better—they are just different timing strategies.
Annual contribution limits and who can open one
The IRS sets a yearly limit on how much you can put into an IRA. That limit changes most years. For 2024, the limit is $7,000 per year if you are under 50, and $8,000 if you are 50 or older (the extra $1,000 is called a "catch-up" contribution). Check the IRS website or ask your bank what the current year's limit is, because it will be different in 2025 and beyond.
You can open an IRA as long as you have earned income—money from a job or self-employment. You do not need to be a certain age to open one, but you cannot withdraw without penalty before age 59½ in most cases. There is no upper age limit for opening a Traditional IRA, though Roth IRAs have income limits that phase out at higher earnings.
If you are married and one spouse does not work, you can still open a spousal IRA in that spouse's name, as long as the working spouse has enough earned income to cover both contributions.
How the money inside an IRA grows
An IRA is a container—it holds investments. When you open an IRA at a bank or brokerage, you decide what to put inside it. You might buy individual stocks, mutual funds, exchange-traded funds (ETFs), bonds, or even keep cash. The IRA itself does not invest; you do. The tax advantage is that whatever you buy inside the IRA grows without being taxed on the gains each year.
If you own a stock mutual fund in a regular account and it gains $5,000 in value, you might owe taxes on that gain. If the same fund is inside an IRA, that $5,000 gain is not taxed that year. It keeps growing, compounded, until you withdraw it. Over decades, this tax-free growth can add up significantly.
Some people find choosing investments overwhelming and use a target-date fund—a single fund that automatically adjusts from stocks to bonds as you get closer to retirement. Others build their own mix. The point is that the IRA is just the legal wrapper; the growth depends on what you put inside and how well those investments perform.
Withdrawal rules and the 59½ age requirement
You cannot withdraw money from an IRA before age 59½ without paying a 10 percent penalty on top of income taxes (in a Traditional IRA) or just the penalty (in a Roth IRA, on earnings). There are a few exceptions—you can withdraw without penalty for a first home purchase (up to $10,000 lifetime), certain medical expenses, or disability—but in general, an IRA is meant to stay locked until retirement.
Once you turn 59½, you can withdraw as much or as little as you want, whenever you want, with no penalty. With a Traditional IRA, you will owe income tax on withdrawals. With a Roth IRA, you owe no tax on withdrawals as long as the account has been open for at least five years.
At age 73, the IRS requires you to start taking minimum withdrawals from a Traditional IRA each year (called Required Minimum Distributions, or RMDs). Roth IRAs do not have this requirement during your lifetime, which is another reason some people prefer them.
IRA versus 401(k): When you might have both
If your employer offers a 401(k), you can still open and contribute to an IRA. They work together. A 401(k) is an employer plan—your employer sets it up, may match your contributions, and handles the investments. An IRA is your own account that you open and manage yourself.
Many people max out their 401(k) first (especially if the employer matches), then open an IRA to save additional money. The annual contribution limits are separate, so you can put money into both in the same year. Some people have an IRA because they are self-employed or do freelance work, and a 401(k) through a separate job.
The main reason to have both is that they offer different features. A 401(k) may have lower investment fees through your employer's plan, but an IRA gives you more control over what you invest in and where you open it.
Where to open an IRA and what to expect
You can open an IRA at almost any bank, credit union, or brokerage. Common places include Vanguard, Fidelity, Charles Schwab, your local bank, or even some online-only brokerages. The process usually takes 10 to 20 minutes online or in person. You will need to provide your name, Social Security number, address, and employment information.
Once the account is open, you fund it by transferring money from your checking or savings account. Then you choose what to invest in—or ask the institution for help if you are unsure. Some brokerages offer robo-advisors that build a portfolio for you based on your age and risk tolerance.
There are no monthly fees at most major institutions, though some charge annual fees if your balance is very small. Shop around and compare, because fees vary. Once your account is set up, you can add money whenever you want (up to the annual limit) and change your investments as often as you like.
Frequently Asked Questions
Can I have more than one IRA?
Yes, you can have multiple IRAs at different institutions. However, your total contributions across all IRAs cannot exceed the annual limit. For example, if the limit is $7,000, you cannot put $7,000 in one IRA and $7,000 in another—your combined total must be $7,000 or less.
What happens to my IRA if I change jobs?
Your IRA stays with you and is not affected by job changes. It is separate from any employer plan. If you have a 401(k) from a previous job, you can roll it into an IRA, which gives you more control over the investments, though you should understand the tax implications first.
Can I withdraw money from my Roth IRA before 59½?
You can withdraw the money you contributed (not the earnings) from a Roth IRA at any time without penalty or taxes, because you already paid taxes on it. Withdrawing the earnings before 59½ triggers a 10 percent penalty and taxes, with some exceptions like first-time home purchase or disability.
Do I need a lot of money to open an IRA?
Most institutions let you open an IRA with as little as $0 to $500, depending on the brokerage. You do not need thousands of dollars to start. You can open the account and begin contributing gradually, even $50 or $100 at a time, as long as you stay within the annual limit.
What is the difference between a SEP IRA and a Solo 401(k)?
Both are for self-employed people and small business owners. A SEP IRA is simpler to set up and manage, while a Solo 401(k) allows higher contributions and loans against the account. A SEP IRA is usually the better choice if you are self-employed with no employees; a Solo 401(k) works if you want more flexibility and higher contribution limits.