An IRA is a tax-advantaged savings account you open yourself to save for retirement

An Individual Retirement Account (IRA) is a savings account that the federal government lets you open on your own — you do not need an employer to set one up. The main benefit is tax treatment: money you put in may reduce your taxable income in the year you contribute, and the money grows without being taxed each year. You pay taxes only when you withdraw the money in retirement.

The IRA is not an investment itself. It is a container. Inside it, you choose what to invest in — stocks, bonds, mutual funds, or even keep cash. The tax advantage applies no matter what you hold inside.

You can open an IRA at a bank, credit union, brokerage firm, or investment company. The account is yours alone; your employer has no role in it, even if you also have a workplace retirement plan.

Key Takeaways

  • An IRA is a personal retirement savings account where contributions may lower your taxes and growth is tax-deferred until you withdraw the money.
  • The two main types are Traditional IRAs, where contributions may be tax-deductible, and Roth IRAs, where contributions are made with after-tax money but withdrawals in retirement are tax-free.
  • You can contribute only if you have earned income (wages, self-employment income, or similar), and contribution limits change each year.
  • You cannot withdraw money before age 59½ without penalty in most cases, though some exceptions exist for hardship or first-time home purchase.
  • An IRA is separate from workplace plans like 401(k)s and you can have both at the same time.

Traditional IRA versus Roth IRA: the two main types

A Traditional IRA works like this: you contribute money, and if your income is below a certain threshold, that contribution reduces your taxable income for that year. The money grows tax-free inside the account. When you withdraw it in retirement (age 59½ or later), you pay income tax on the full amount you take out.

A Roth IRA works the opposite way. You contribute money that has already been taxed (it does not reduce your current-year taxes). The money grows tax-free inside the account. When you withdraw it in retirement, you owe no tax on any of it — not on your contributions and not on the growth.

Which one makes sense depends on whether you think your tax rate will be higher now or in retirement. If you are young and in a low tax bracket now, a Roth often makes more sense because you lock in today's low rate. If you are in a high tax bracket now and expect to be in a lower one in retirement, a Traditional IRA often saves more money overall.

You can have both a Traditional and a Roth IRA at the same time, but your total contributions across both accounts cannot exceed the annual limit.

Contribution limits and who can contribute

To contribute to an IRA, you must have earned income — wages from a job, self-employment income, or similar. You cannot contribute based on investment income or spousal income alone, though a non-working spouse can contribute to a spousal IRA if the working spouse has enough earned income.

The amount you can contribute each year has a legal limit set by the IRS. This limit changes most years. For example, in 2024 the limit was $7,000 for people under age 50, and $8,000 for people age 50 and older (the extra $1,000 is called a catch-up contribution). Check the IRS website or your IRA provider for the current year's limit.

You can contribute only up to the amount of earned income you made that year. If you earned $4,000, you can contribute at most $4,000, even if the legal limit is higher.

For a Traditional IRA, there is no age limit on contributions as long as you have earned income. For a Roth IRA, there is no age limit either, but your ability to contribute phases out if your income is above a certain level (the threshold depends on your filing status and changes each year).

When you can withdraw money and what happens if you withdraw early

You can withdraw money from your IRA anytime, but the tax and penalty consequences depend on your age and the type of IRA.

With a Traditional IRA, if you withdraw before age 59½, you generally owe income tax on the withdrawal plus a 10% penalty. Some exceptions exist: you can withdraw without penalty for a first-time home purchase (up to $10,000 lifetime), medical expenses, disability, or a few other hardship situations. You must still pay income tax on the withdrawal, but the 10% penalty is waived.

With a Roth IRA, you can withdraw your contributions (the money you put in) anytime, tax-free and penalty-free. You cannot withdraw the earnings (growth) before age 59½ without owing the 10% penalty, though the same exceptions apply. This flexibility is one reason many people prefer Roth IRAs early in their working life.

At age 73, you must begin taking Required Minimum Distributions (RMDs) from a Traditional IRA — the IRS requires you to withdraw a certain amount each year. Roth IRAs have no RMD requirement during the account holder's lifetime, which is another advantage for people who do not need the money right away.

How an IRA differs from a 401(k) or other workplace plan

A 401(k) is a retirement plan your employer sets up and manages. An IRA is a personal account you open yourself. You can have both at the same time.

A 401(k) usually allows much higher annual contributions — in 2024, the limit was $23,500 for people under 50. An IRA's limit is lower. However, a 401(k) requires your employer to offer one, and not all employers do. An IRA you can open on your own, anytime.

If your employer offers a 401(k) with a match (the employer contributes money if you contribute), it often makes sense to contribute enough to get the full match before maxing out an IRA. The match is assistance programs.

Some people have both a 401(k) and an IRA. Others have only an IRA because their employer does not offer a 401(k), or they are self-employed.

How to open an IRA and where to open one

Opening an IRA is straightforward. You choose a financial institution — a bank, credit union, brokerage firm, or investment company — and contact them to open an account. Most offer online applications that take 10 to 15 minutes.

You will need to provide your name, address, Social Security number, and information about your employment. You will choose whether you want a Traditional or Roth IRA. You will also decide what to invest the money in — the institution will show you options like mutual funds, individual stocks, bonds, or money market accounts.

Once the account is open, you can contribute money by transferring it from your bank account. You can contribute all at once or in smaller amounts throughout the year, as long as you do not exceed the annual limit.

If you already have an IRA at one institution and want to move it to another, you can do a rollover or transfer. A rollover means the old institution sends you a check and you deposit it in the new account within 60 days. A transfer means the institutions move the money directly between accounts, which is simpler and avoids the 60-day deadline. Most people choose a direct transfer.

Tax deductions and income limits for Traditional IRAs

With a Traditional IRA, whether your contribution is tax-deductible depends on your income and whether you have access to a workplace retirement plan.

If you do not have a workplace plan (no 401(k), 403(b), or similar), your entire Traditional IRA contribution is tax-deductible, no matter your income.

If you do have a workplace plan, your ability to deduct a Traditional IRA contribution phases out above a certain income level. The threshold depends on your filing status (single, married filing jointly, etc.) and changes each year. For example, in 2024, the phase-out for a single person with a workplace plan started at $77,000 of income. If your income was above that range, you could not deduct the contribution.

You can still contribute to a Traditional IRA even if you cannot deduct it — the money just goes in with after-tax dollars. However, this creates a record-keeping burden (you must track basis), so many people in this situation choose a Roth IRA instead.

Frequently Asked Questions

Can I have more than one IRA?

Yes. You can have multiple Traditional IRAs, multiple Roth IRAs, or both types. However, your total contributions across all IRAs in a single year cannot exceed the annual limit. If you have two Roth IRAs and contribute $4,000 to one, you can contribute only $3,000 to the other (assuming the $7,000 limit for 2024).

What happens to my IRA if I change jobs?

Your IRA is yours alone and is not affected by a job change. If your new employer offers a 401(k), you can keep the IRA and contribute to the 401(k) separately. If you want to move money from an old 401(k) into an IRA, you can do a rollover or transfer.

Can I withdraw from my IRA to buy a house?

With a Traditional IRA, you can withdraw up to $10,000 for a first-time home purchase without the 10% early withdrawal penalty, though you still owe income tax. With a Roth IRA, you can withdraw your contributions anytime tax-free and penalty-free. You can withdraw earnings for a first-time home purchase (up to $10,000) without the penalty, but you owe income tax on the earnings.

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

A savings account is just a place to hold cash. An IRA is a tax-advantaged account where you can hold investments like stocks and bonds. The tax advantage — deductible contributions and tax-deferred growth — is the main reason to use an IRA instead of a regular savings account for retirement money.

Do I need to report my IRA on my taxes?

You report IRA contributions and withdrawals on your tax return. If you made a deductible Traditional IRA contribution, you claim it as a deduction. If you took a withdrawal, the financial institution sends you a form (1099-R) showing the amount, and you report it on your return. Roth contributions are not reported, but withdrawals are.