An IRA is a tax-advantaged account you open at a bank, brokerage, or credit union to hold retirement savings

An Individual Retirement Account (IRA) is a container for money you set aside for retirement. You open it yourself—not through an employer—and you control what goes into it and how it's invested. The account sits at a financial institution: a bank, an online brokerage like Fidelity or Vanguard, a credit union, or an investment firm.

The main reason to use an IRA instead of a regular savings account is the tax treatment. Depending on which type of IRA you choose, your contributions may reduce your taxable income in the year you make them, or your withdrawals in retirement may be tax-free. The money inside the account also grows without being taxed each year—you only pay taxes when you withdraw it (or in some cases, never). This tax shelter is what makes an IRA powerful for long-term saving.

You can't touch the money penalty-free until you turn 59½. If you withdraw before that age, you typically owe income tax on the withdrawal plus a 10% penalty. There are narrow exceptions—first-time home purchase, disability, medical expenses—but the general rule is: money in an IRA stays there until retirement.

Key Takeaways

  • An IRA is a personal retirement account you open yourself, and the tax benefits depend on which type you choose and how much you earn.
  • You contribute money to the account, then invest it in stocks, bonds, mutual funds, or other assets; the growth inside the account is not taxed year to year.
  • Withdrawals before age 59½ usually trigger a 10% penalty plus income tax, which is why IRAs are designed for long-term retirement saving.
  • You can contribute only up to a set annual limit, which changes each year and depends on your age and income level.
  • At age 73, you must begin taking required minimum distributions (RMDs) from most IRAs, meaning you must withdraw a set amount each year.

How money flows in: contribution limits and income rules

You put money into an IRA by making a contribution. The amount you can contribute each year has a legal limit set by the IRS. For 2024, that limit is $7,000 if you're under 50, and $8,000 if you're 50 or older (the extra $1,000 is called a catch-up contribution). These limits change most years, so check the IRS website or your financial institution for the current year's cap.

For a Traditional IRA, you can deduct your contribution from your taxable income—but only if you meet income limits. If you or your spouse has a workplace retirement plan like a 401(k), your ability to deduct a Traditional IRA contribution phases out at higher income levels. If neither of you has a workplace plan, you can deduct the full amount regardless of income. For a Roth IRA, contributions are never deductible, but income limits apply to who can contribute at all. In 2024, Roth contributions phase out for single filers earning above $146,000 and married filers earning above $230,000.

You can contribute to an IRA only if you have earned income—money from a job or self-employment. You can't fund an IRA with investment returns, inheritance, or unemployment benefits. If you're married and one spouse doesn't work, you can still fund an IRA for that spouse using the working spouse's income, through what's called a spousal IRA.

How money grows: investment choices inside the account

Once money is in your IRA, you decide how to invest it. The account itself is just a container; the financial institution holds the money and executes your trades. Most IRAs let you buy stocks, bonds, mutual funds, exchange-traded funds (ETFs), and sometimes other assets like real estate investment trusts (REITs) or certificates of deposit (CDs).

The tax advantage kicks in here: if you buy a stock for $100 and it grows to $500, you owe no tax on that $400 gain while it sits in the IRA. If you sold that same stock in a regular brokerage account, you'd owe capital gains tax on the $400 profit. In an IRA, the growth compounds year after year without annual tax drag.

You can also move money between investments inside the IRA without triggering taxes. You can sell one mutual fund and buy another, or shift from stocks to bonds, and none of those trades create a taxable event. This flexibility lets you rebalance your portfolio as you age or as your goals change.

Traditional IRA vs. Roth IRA: when you pay the tax

The two main IRA types differ in when you get the tax break. With a Traditional IRA, you deduct contributions now and pay income tax on withdrawals in retirement. With a Roth IRA, you contribute after-tax money now, but withdrawals in retirement are tax-free.

Choose a Traditional IRA if you expect to be in a lower tax bracket in retirement than you are now, or if you want to reduce your taxable income this year. Choose a Roth if you expect to be in a higher tax bracket later, or if you want tax-free income in retirement. A Roth also has no required minimum distributions, so you can leave the money untouched longer if you don't need it.

Some people split the difference by funding both types, though the combined contributions still can't exceed the annual limit. There's also a SEP IRA for self-employed people and small business owners, which allows much higher contributions, and a SIMPLE IRA for small employers. Those are less common and have different rules.

Withdrawals and required minimum distributions

You can withdraw money from your IRA anytime, but the tax and penalty consequences depend on your age and the account type. Before age 59½, a withdrawal from a Traditional IRA is taxed as ordinary income plus a 10% penalty on the amount withdrawn. A Roth IRA lets you withdraw contributions (not earnings) anytime without tax or penalty, but earnings withdrawn before 59½ are taxed and penalized.

At age 73, the IRS requires you to start taking money out of a Traditional IRA, 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; the IRS publishes tables each year. If you don't take the RMD, you owe a penalty on the amount you should have withdrawn. Roth IRAs have no RMD during the account owner's lifetime, which is another reason some people prefer them.

If you inherit an IRA from someone other than a spouse, the rules are stricter. You generally must withdraw the entire balance within 10 years, though the timing of annual withdrawals varies by situation.

Rolling over or transferring an IRA

You can move money from one IRA to another without penalty or tax consequences, as long as you follow the rules. A direct transfer (also called a trustee-to-trustee transfer) is the safest method: the old financial institution sends the money directly to the new one, and you never touch it. This avoids any 60-day deadline or withholding issues.

A rollover is when you withdraw the money yourself and deposit it into another IRA within 60 days. This works, but it's riskier: if you miss the 60-day window, the withdrawal is treated as a taxable distribution. You can do only one rollover per IRA per year, so if you're moving money around frequently, direct transfers are better.

You can also roll money from a workplace retirement plan—like a 401(k) or 403(b)—into an IRA. This is common when you leave a job. The rules are similar: direct transfer is safest, and you have 60 days if you do a rollover yourself.

Common mistakes and how to avoid them

One frequent error is over-contributing. If you contribute more than the annual limit, you owe a 6% excise tax on the excess amount each year it sits in the account. The fix is to withdraw the excess and any earnings on it before your tax return deadline. Your financial institution should track your contributions, but it's worth double-checking if you have multiple IRAs or if you also have a workplace plan.

Another mistake is missing the RMD deadline. If you turn 73 in 2024, your first RMD is due by December 31, 2024. If you miss it, the penalty is steep: 25% of the amount you should have withdrawn (or 10% if you correct it within two years). Set a calendar reminder or ask your financial institution to calculate and remind you each year.

A third pitfall is withdrawing before 59½ without understanding the exceptions. The 10% penalty applies to most early withdrawals, but there are narrow exceptions: first-time home purchase (up to $10,000 lifetime), disability, medical expenses, and a few others. If you think you might need the money before retirement, a Roth IRA is more flexible because you can always withdraw contributions.

Frequently Asked Questions

Can I have more than one IRA?

Yes. You can open multiple Traditional IRAs, multiple Roth IRAs, or both. However, your total contributions across all IRAs in a single year cannot exceed the annual limit. If you have IRAs at different institutions, you're responsible for tracking the total and not over-contributing.

What happens to my IRA if I die?

Your IRA passes to the beneficiary you named on the account. A spouse can roll it into their own IRA or treat it as their own. Non-spouse beneficiaries must withdraw the balance within 10 years (with some exceptions for certain family members). The beneficiary owes income tax on withdrawals from a Traditional IRA but not from a Roth.

Can I borrow from my IRA?

No, not directly. However, you can do a rollover withdrawal, spend the money, and redeposit it within 60 days—but this is risky and not recommended. Some workplace plans like 401(k)s allow loans, but IRAs do not.

What if I change my mind about a contribution?

You can undo a contribution by requesting a recharacterization before your tax return deadline (usually April 15 of the following year). This removes the contribution and any earnings on it from the account. You'll owe tax on the earnings, but you can correct an over-contribution this way.

Do I need earned income to contribute to an IRA every year?

Yes. You can contribute only up to the amount of earned income you had that year. If you earned $3,000, you can contribute up to $3,000 to an IRA, even if the annual limit is higher. The exception is a spousal IRA, where the working spouse's income covers both accounts.