An IRA is a savings account the government lets you use for retirement, with tax breaks you don't get from a regular bank account

An IRA — Individual Retirement Account — is a container you open at a bank, brokerage, or credit union to hold money set aside for retirement. The government created it to encourage people to save. The main benefit is that money inside an IRA grows without being taxed every year the way it would in a regular savings or investment account. You also get a tax break on the money you put in, though the exact break depends on which type of IRA you choose and how much you earn.

You control what happens to the money inside the IRA — you decide how much to put in each year (up to a legal limit), and you decide what to invest it in, whether that's a savings account earning interest, stocks, bonds, mutual funds, or a mix. The IRA itself is just the legal wrapper. What matters is that the money sits there growing until you reach retirement age, at which point you can take it out.

Key Takeaways

  • An IRA is a tax-advantaged account you open to save money for retirement, and the money inside grows without being taxed each year.
  • The two most common types are a Traditional IRA, where you get a tax break when you put money in, and a Roth IRA, where you get a tax break when you take money out in retirement.
  • You can open an IRA at a bank, brokerage, or credit union, and you decide what to invest the money in.
  • There are yearly limits on how much you can put in — for 2024 the limit is $7,000 for most people, or $8,000 if you are 50 or older.
  • You generally cannot withdraw money before age 59½ without paying a penalty, though some exceptions exist for hardship situations.

Traditional IRA vs. Roth IRA: The main difference is when you get the tax break

A Traditional IRA gives you a tax break in the year you put money in. If you contribute $7,000 to a Traditional IRA, you can deduct that $7,000 from your income on your tax return, which lowers the taxes you owe that year. The money then grows inside the account without being taxed. When you retire and start taking money out, that withdrawal is taxed as income. This works well if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA works in reverse. You put money in with after-tax dollars — no deduction on your tax return that year. But the money grows inside the account without being taxed, and when you retire and take it out, the withdrawal is tax-free. This works well if you expect to be in a higher tax bracket in retirement, or if you straightforward want the certainty of knowing your withdrawals will not be taxed.

Both accounts have the same yearly contribution limit and the same age-based withdrawal rules. The choice between them depends on your current income, your expected retirement income, and your tax situation — something a tax professional can help you think through.

How much you can put in each year

The IRS sets a yearly limit on how much you can contribute to an IRA. For 2024, the limit is $7,000 per year if you are under 50, and $8,000 per year if you are 50 or older (the extra $1,000 is called a "catch-up contribution"). These limits change periodically — the IRS adjusts them for inflation roughly every few years.

The limit applies across all your IRAs combined. If you have both a Traditional IRA and a Roth IRA, your total contributions to both cannot exceed the yearly limit. You can split the money however you want between them, but the total is capped.

You can contribute to an IRA only if you have earned income — money from a job or self-employment. You cannot fund an IRA with investment returns, inheritance, or other unearned money. If you are married and one spouse does not work, some rules allow a non-working spouse to have an IRA funded by the working spouse's income, but the total still counts toward the household limit.

When you can take money out without a penalty

IRAs are designed for retirement, and the government discourages early withdrawal by charging a 10% penalty on top of income tax if you take money out before age 59½. However, there are exceptions. You can withdraw without the penalty if you are disabled, if you are a first-time homebuyer (up to $10,000 lifetime), if you have large medical expenses, or if you are unemployed and need money for health insurance premiums.

The rules differ slightly between Traditional and Roth IRAs. With a Roth IRA, you can withdraw the money you contributed (not the earnings) at any time without penalty, because you already paid tax on it. With a Traditional IRA, any withdrawal before 59½ is subject to the penalty unless one of the exceptions applies.

At age 73, the IRS requires you to start taking money out of a Traditional IRA — these are called Required Minimum Distributions, or RMDs. You must withdraw a certain amount each year based on your age and account balance. Roth IRAs do not have this requirement during your lifetime, which is one reason some people prefer them.

Where to open an IRA and what to invest in

You can open an IRA at almost any financial institution: a bank, a brokerage firm like Fidelity or Vanguard, a credit union, or an online investment platform. Each institution offers different investment options inside the IRA. A bank might offer only savings accounts or CDs. A brokerage offers stocks, bonds, mutual funds, and exchange-traded funds. Some platforms specialize in low-cost index funds.

The choice of where to open the account often comes down to what you want to invest in and how much you want to pay in fees. Some institutions charge annual account fees; others charge per transaction. Many offer no-fee accounts if you meet a minimum balance. Compare a few options before opening, because switching later is possible but involves paperwork.

Once the account is open, you decide what to invest the money in. If you are unsure, many institutions offer target-date funds — a single fund that automatically adjusts its mix of stocks and bonds as you get closer to retirement. These are a straightforward option for people who do not want to pick individual investments.

Income limits and whether you can deduct contributions

For a Roth IRA, there are income limits. If you earn above a certain threshold, you cannot contribute to a Roth IRA at all. The threshold varies by filing status and changes yearly — for 2024, a single filer begins to phase out at $146,000 and is completely blocked at $161,000. Married couples have higher thresholds. If your income exceeds the limit, you can still open a Traditional IRA, but you may not be able to deduct your contributions if you are also covered by a workplace retirement plan like a 401(k).

The deduction phase-out for Traditional IRAs also depends on whether you have access to a workplace plan. If you do not have a workplace plan, you can always deduct your full Traditional IRA contribution regardless of income. If you do have one, the deduction phases out at higher income levels. A tax professional or the IRS website can tell you whether your specific situation allows a deduction.

IRAs vs. workplace retirement plans like a 401(k)

An IRA is separate from a 401(k) or other workplace retirement plan. Many people have both. A 401(k) is offered by your employer, and your employer may match part of what you contribute. An IRA is something you open on your own. The yearly contribution limits are separate — you can max out both in the same year if you have the income to do so.

If your employer offers a 401(k) with a match, financial advisors often recommend contributing enough to get the full match before maxing out an IRA, because the match is information programs. After that, whether to prioritize the IRA or the 401(k) depends on fees, investment options, and your tax situation. An IRA often has lower fees and more investment choices, while a 401(k) may offer better loan options or employer matching.

Frequently Asked Questions

Can I have more than one IRA?

Yes. You can have multiple Traditional IRAs, multiple Roth IRAs, or both. However, your total contributions across all of them cannot exceed the yearly limit. Having multiple accounts does not increase how much you can put in — it just means the money is split across different institutions or account types.

What happens to my IRA if I change jobs?

Your IRA stays with you regardless of employment. It is not tied to your job. If your new employer offers a 401(k), you can keep your IRA separate and contribute to both. You can also roll over money from an old 401(k) into an IRA if you leave a job, which often gives you more investment choices and lower fees.

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 without the 10% early withdrawal penalty, though income tax still applies. With a Roth IRA, you can withdraw your contributions (not earnings) anytime without penalty. The rules are strict about what counts as a first-time purchase, so check the IRS definition before assuming you may have access to.

What if I do not have earned income — can I still open an IRA?

No, you need earned income from a job or self-employment to contribute to an IRA. If you are married and your spouse works, a spousal IRA allows you to fund an account based on their income. If you have no earned income and no working spouse, you cannot contribute, though you can still hold an existing IRA and let it grow.

Do I have to invest in stocks, or can I just keep the money in a savings account?

You can keep IRA money in a savings account or CD earning interest — you do not have to invest in stocks. The tax advantage works the same way. However, savings accounts and CDs typically earn lower returns than stock or bond investments over long periods, so many people use stocks or funds to grow the money faster over decades.