An IRA is a personal savings account the government lets you use tax-free or tax-deferred to build retirement money

An Individual Retirement Account (IRA) is a container you open at a bank, brokerage, or credit union where you deposit your own money, invest it, and let it grow until you reach retirement age. The government does not put money in — you do. What makes an IRA different from a regular savings account is that the money you put in may reduce your taxes now, and the growth inside the account is not taxed year to year. When you withdraw the money in retirement, you pay taxes then (or never, depending on which type of IRA you choose).

You control what happens inside the account. You decide how much to deposit each year (up to a legal limit), what to invest it in (stocks, bonds, mutual funds, or cash), and when to take money out after age 59½. The account stays open as long as you want it to, and you can have more than one.

Key Takeaways

  • You open an IRA yourself at a financial institution and deposit your own money; the government does not fund it or manage it.
  • Contributions to a Traditional IRA may lower your taxable income in the year you make them, while Roth IRA contributions are made with after-tax money but grow tax-free.
  • Money inside an IRA grows without being taxed each year, which means compound growth works faster than in a regular account.
  • You cannot withdraw money penalty-free before age 59½ in most cases, and you must start taking withdrawals from a Traditional IRA at age 73.
  • An IRA is separate from an employer retirement plan like a 401(k), though you can have both at the same time.

Where you open an IRA and what it costs

You open an IRA directly with a financial institution — a bank, brokerage firm, credit union, or robo-advisor. Common places include Fidelity, Vanguard, Charles Schwab, Ally Bank, and many others. There is no central government office to go to; you choose the institution.

Most IRAs cost nothing to open. Some institutions charge annual account fees (often $0 to $25 per year), and some waive the fee if you keep a minimum balance or set up automatic deposits. When you invest the money inside the account, you may pay investment fees — for example, a mutual fund might charge 0.05% to 1% per year depending on the fund. Read the fee schedule before you open the account so you know what to expect.

How contributions work and the annual limit

You contribute money to your IRA from your own paycheck or bank account. There is no employer involved (unless you have a special type like a SEP-IRA for self-employed people). You decide when and how much to deposit, as long as you stay within the annual limit set by the IRS.

The contribution limit changes most years. For 2024, the limit is $7,000 per year if you are under age 50, and $8,000 if you are 50 or older. The limit applies to all your IRAs combined — if you have two IRAs, your total contributions across both cannot exceed the limit. You can contribute in a lump sum or spread deposits throughout the year. Contributions must be made by the tax filing deadline (usually April 15 of the following year) to count toward that tax year.

The difference between Traditional and Roth IRAs

A Traditional IRA lets you deduct your contributions from your taxable income in the year you make them, which lowers your tax bill now. The money grows tax-free inside the account, but when you withdraw it in retirement, you pay income tax on the full amount. This makes sense if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA works the opposite way. You contribute money that you have already paid taxes on (no deduction now), but the money grows tax-free and you pay zero taxes on withdrawals in retirement. This makes sense if you expect to be in a higher tax bracket later, or if you want tax-free income in retirement. Roth IRAs also have no required withdrawals at any age, which gives you more control.

You cannot contribute to both types in the same year beyond the annual limit — the limit is shared. Your income may also limit whether you can contribute to a Roth or deduct a Traditional contribution, depending on your salary and whether you have an employer retirement plan.

How your money grows inside the account

Once money is in your IRA, you choose what to invest it in. Most people buy mutual funds, exchange-traded funds (ETFs), individual stocks, or bonds. Some people keep cash in a money market fund or savings option within the IRA. Whatever you choose, any gains — dividends, interest, or capital appreciation — are not taxed each year the way they would be in a regular investment account.

This tax-deferred or tax-free growth is the main advantage of an IRA. If you invest $7,000 and it grows to $50,000 over 30 years, you do not owe taxes on that $43,000 gain until you withdraw it (or ever, in a Roth). In a regular taxable account, you would owe taxes on dividends and gains each year, which slows compound growth.

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

You can withdraw money from your IRA anytime, but the government penalizes you if you do before age 59½. The penalty is 10% of the amount withdrawn, plus you owe income tax on the withdrawal. So if you withdraw $10,000 at age 45 from a Traditional IRA, you lose $1,000 to the penalty and owe income tax on the full $10,000 as well.

There are a few exceptions where you can withdraw early without the 10% penalty: a first-time home purchase (up to $10,000 lifetime), certain medical expenses, disability, or a series of equal payments over your lifetime. Roth IRAs have an additional exception: you can always withdraw the money you contributed (not the growth) without penalty, though growth withdrawals before 59½ still face the 10% penalty.

Once you turn 59½, you can withdraw as much as you want, whenever you want, with no penalty. You still owe income tax on Traditional IRA withdrawals, but there is no extra cost for taking the money out.

Required withdrawals and account management

If you have a Traditional IRA, you must start taking withdrawals at age 73. The IRS calculates a minimum amount you must withdraw each year based on your age and account balance — this is called a Required Minimum Distribution (RMD). If you do not take the RMD, you owe a 25% penalty on the amount you should have withdrawn (reduced to 10% if you correct it within two years).

Roth IRAs have no required withdrawals during your lifetime, which is one reason some people prefer them. You can leave the money untouched for as long as you want, and your heirs inherit it tax-free.

You manage your IRA through the financial institution where you opened it. You can log in online to see your balance, change your investments, make deposits, or request withdrawals. Most institutions send you a statement quarterly or annually. You are responsible for tracking your contributions for tax purposes — keep records of how much you put in each year.

How an IRA differs from a 401(k) or other employer plans

An IRA is your own account that you open and fund yourself. A 401(k) is an employer retirement plan where your employer sets up the account and you contribute through payroll deductions. You can have both at the same time — many people do. The contribution limits are separate: the 401(k) limit is much higher (around $23,500 in 2024), and the IRA limit is $7,000. If your employer offers a 401(k) match, you usually want to contribute enough to get the full match before maxing out an IRA, because the match is assistance programs.

If you leave a job, you can roll the 401(k) balance into an IRA, which gives you more investment choices and lower fees in many cases. This is called a rollover. You have 60 days to complete the rollover, or the money becomes taxable income.

Frequently Asked Questions

Can I have more than one IRA?

Yes, you can open multiple IRAs at different institutions. However, your total contributions across all IRAs cannot exceed the annual limit. If you have a Traditional IRA and a Roth IRA, your combined contributions must stay within the $7,000 (or $8,000 if age 50+) yearly cap.

What happens to my IRA if I die?

Your IRA passes to the beneficiary you named when you opened the account. They can inherit it as a lump sum, take distributions over time, or roll it into their own IRA in some cases. The rules vary by IRA type and your beneficiary's relationship to you, so name a beneficiary and review it every few years.

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

You can withdraw up to $10,000 lifetime from a Traditional or Roth IRA for a first-time home purchase without the 10% early withdrawal penalty. You still owe income tax on the withdrawal from a Traditional IRA. This is a one-time exception, so use it carefully.

Do I need earned income to open an IRA?

Yes, you must have earned income (wages, self-employment income, or taxable alimony) in the year you contribute. You cannot contribute more than you earned. A spouse with no income can open a spousal IRA if the working spouse has enough income to cover both contributions.

What if I cannot afford to contribute the full limit?

Contribute what you can. There is no minimum contribution amount. Even $50 or $100 per month adds up over time, and you get the same tax benefits as someone who contributes the full limit. Start with what fits your budget and increase it when you can.