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

An IRA (Individual Retirement Account) is a savings account with special tax rules built in by the federal government. You open it at a bank, brokerage, or credit union — not through an employer. The account lets you put money in, invest it, and withdraw it later in retirement while paying less in taxes than you would on regular savings.

The tax advantage is the whole point. Money you put into certain IRAs reduces your taxable income for that year. When you withdraw the money in retirement, you pay income tax on it then — but by that time you may be in a lower tax bracket. Other IRA types let you put in after-tax money now and withdraw it tax-free later. Either way, the account itself grows without being taxed each year on gains, which means your money compounds faster than it would in a regular savings account.

You can open an IRA on your own, whether or not you have a job. You do not need an employer to set one up for you. This is different from a 401(k), which your employer sponsors. An IRA is yours to manage, and you decide how much to contribute each year (within legal limits) and where to invest the money.

Key Takeaways

  • An IRA is a personal retirement savings account you open yourself, with tax rules that reduce what you owe the government now or later.
  • You can open an IRA at a bank, brokerage, or credit union, and you control how much you contribute and where the money is invested.
  • The two main types are Traditional IRAs (tax deduction now, taxes on withdrawal later) and Roth IRAs (no deduction now, tax-free withdrawal later).
  • The IRS sets annual contribution limits, which change year to year, and you cannot withdraw money before age 59½ without penalty in most cases.
  • An IRA works alongside other retirement savings — it does not replace a 401(k) or pension, but you can have both at the same time.

Traditional IRA versus Roth IRA: the tax timing difference

The two most common IRA types differ in when you get the tax break. A Traditional IRA lets you deduct your contributions from your income taxes in the year you make them. If you earn $60,000 and contribute $7,000 to a Traditional IRA, you report only $53,000 as taxable income that year. You pay no tax on the money while it sits in the account. When you withdraw it in retirement, you pay income tax on the full amount at that time.

A Roth IRA works backward. You contribute money that has already been taxed — no deduction on your tax return. The money grows tax-free inside the account, and when you withdraw it in retirement, you owe no income tax on any of it, including the gains. This means if you put in $7,000 and it grows to $25,000, you withdraw all $25,000 with no tax bill.

Which one makes sense depends on your situation now versus your expected situation in retirement. If you expect to be in a lower tax bracket later, a Traditional IRA saves you more money overall. If you expect to be in the same bracket or higher, a Roth IRA is usually better. Many people split the difference and have both types.

Contribution limits and who can open one

The IRS sets an annual limit on how much you can put into an IRA each year. For 2024, that limit is $7,000 if you are under age 50, and $8,000 if you are 50 or older (the extra $1,000 is called a "catch-up" contribution). These limits change periodically, so you should check the current year's limit before you contribute.

You can open an IRA if you have earned income — money from a job or self-employment. You cannot open one if your only income is from investments, Social Security, or unemployment benefits. If you are married and one spouse does not work, that spouse can open a Spousal IRA using the working spouse's income, up to the same annual limit.

For a Roth IRA specifically, there are income limits. If you earn above a certain amount, you cannot contribute to a Roth directly, though you may be able to use a workaround called a "backdoor Roth." A Traditional IRA has no income limit for contributions, but the tax deduction phases out if you have high income and access to a workplace retirement plan.

How money moves in and out of an IRA

You fund an IRA by transferring money from your bank account to the IRA account. You can do this monthly, annually, or whenever you have money available — there is no requirement to contribute a set amount each month. Many people set up automatic transfers to make it easier, but it is not required.

Once the money is in the account, you decide how to invest it. Most IRAs let you choose from stocks, bonds, mutual funds, exchange-traded funds (ETFs), or straightforward keep cash in the account. Some IRAs are more limited — a bank IRA might offer only CDs or savings options, while a brokerage IRA gives you access to thousands of investments. The account grows based on how your investments perform.

You can withdraw money from an IRA at any time, but there are tax and penalty consequences if you withdraw before age 59½. The IRS charges a 10% early withdrawal penalty on top of income tax owed. Some exceptions exist — you can withdraw without penalty for a first home purchase (up to $10,000 lifetime), medical expenses above a threshold, or disability. At age 59½, you can withdraw without penalty, though you still owe income tax on Traditional IRA withdrawals.

Required withdrawals and what happens at retirement age

Once you reach age 73, the IRS requires you to start taking money out of a Traditional IRA each year, whether you need it or not. This is called a Required Minimum Distribution (RMD). The amount is calculated based on your age and account balance. If you do not take the RMD, the IRS charges a penalty of 25% of the amount you should have withdrawn (this penalty was reduced from 50% in recent years).

Roth IRAs do not have required withdrawals during your lifetime, which is one reason some people prefer them — you can let the money keep growing tax-free as long as you live. Your heirs will have to withdraw the money after you die, but you do not have to during your lifetime.

When you do withdraw money in retirement, the money comes to you as a regular bank transfer or check. You report the withdrawal on your tax return, and you pay income tax on it at your ordinary tax rate that year. If you have a large withdrawal, it might push you into a higher tax bracket, which is why some retirees space out their withdrawals or use other strategies to manage their tax bill.

How an IRA fits with other retirement savings

An IRA is one piece of retirement savings, not the whole picture. If your employer offers a 401(k) or 403(b), you can have both that plan and an IRA at the same time. Many people do — they contribute to the employer plan first (especially if the employer matches contributions), then open an IRA for additional savings.

The contribution limits are separate. Your $7,000 IRA contribution does not count against your 401(k) limit, which is much higher. However, if you have a high income and access to a workplace plan, the tax deduction for a Traditional IRA may be limited or eliminated. This is where tax planning becomes useful — a tax professional can help you figure out which account type makes sense for your situation.

If you are self-employed, you have other options like a SEP IRA or Solo 401(k) that allow much higher contributions than a regular IRA. These are designed for business owners and freelancers who do not have access to an employer plan.

Opening an IRA and choosing where to hold it

You can open an IRA at most banks, credit unions, and brokerages. Common places include Fidelity, Vanguard, Charles Schwab, and your local bank. Each institution has different investment options, fees, and minimum balances. A bank IRA might offer only savings products and CDs, while a brokerage IRA gives you access to stocks and funds.

The process is straightforward: you fill out an process (usually online), provide your Social Security number and basic information, and link a bank account to fund it. The institution will ask you to choose between a Traditional and Roth IRA, and may ask about your investment preferences. Some places offer target-date funds, which automatically adjust from stocks to bonds as you approach retirement age.

There is no cost to open an IRA, though some institutions charge annual maintenance fees or require a minimum balance. Shop around — many brokerages charge no fees and have no minimums. Once it is open, you can change your mind about where it is held. You can transfer an IRA from one institution to another without tax consequences, though the process takes a few weeks.

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 — if you have two Traditional IRAs and contribute $4,000 to each, that is $8,000 total, which exceeds the $7,000 limit. The IRS will penalize you for the overage if you do not correct it.

What happens to my IRA if I change jobs?

Your IRA is yours regardless of employment. It stays open and keeps growing. If your new employer offers a 401(k), you can contribute to both. If you leave your old 401(k) behind, you can roll it into your IRA without taxes or penalties — this is called a rollover and is a common way people consolidate retirement savings.

Can I withdraw money from my IRA to buy a house?

First-time homebuyers can withdraw up to $10,000 lifetime from a Traditional or Roth IRA without the 10% early withdrawal penalty. You still owe income tax on the withdrawal from a Traditional IRA. With a Roth IRA, you can withdraw your contributions (not gains) anytime without tax or penalty, which is another advantage of Roth accounts.

What is the difference between an IRA and a 401(k)?

An IRA is personal and you open it yourself; a 401(k) is offered by your employer. A 401(k) usually has higher contribution limits and may include employer matching. An IRA gives you more control over investments and is portable if you change jobs. Many people use both — the 401(k) for employer match, and an IRA for additional savings.

Do I need to report my IRA on my taxes?

You report contributions to a Traditional IRA as a deduction on your tax return. You report withdrawals as income. For a Roth IRA, contributions do not go on your return, but you may need to report conversions or withdrawals depending on your situation. Your IRA institution sends you a form each year showing activity in the account.