An IRA is a retirement savings account the government lets you open on your own

An IRA stands for Individual Retirement Account. It is a bank or investment account you set up yourself—not through an employer—that gives you tax breaks on money you save for retirement. The government created IRAs to encourage people to set aside money for later in life, so it rewards you by letting you either deduct contributions from your taxes now or withdraw money tax-free later, depending on which type you choose.

The key difference between an IRA and a regular savings account is the tax treatment. When you put money into a regular savings account, you have already paid taxes on that money. When you put money into an IRA, the government either lets you deduct it from your income taxes that year, or it lets you withdraw it without paying taxes later. That tax advantage is the entire reason IRAs exist.

You can open an IRA at a bank, a credit union, a brokerage firm, or an insurance company. The account itself works like any other: you deposit money, it sits there, and you can watch it grow. The restrictions come in when you try to take the money out—the government wants you to leave it alone until you are at least 59½ years old, and it enforces that rule with penalties.

Key Takeaways

  • An IRA is a personal retirement savings account you open yourself, not through an employer, and it comes with tax advantages that a regular savings account does not have.
  • The two most common types are the Traditional IRA, where you may deduct contributions now and pay taxes when you withdraw, and the Roth IRA, where you pay taxes now and withdraw tax-free later.
  • You can open an IRA at a bank, credit union, brokerage, or insurance company, and you control which investments go inside it.
  • The government penalizes you for withdrawing money before age 59½, so an IRA is meant to stay untouched until retirement.
  • There are annual limits on how much you can contribute to an IRA, and these limits change each year.

Traditional IRA versus Roth IRA: The main choice you make

When you open an IRA, you choose between a Traditional IRA and a Roth IRA. The difference is when you pay taxes—now or later.

With a Traditional IRA, you contribute money and may deduct that contribution from your income taxes that year. The money grows without being taxed each year. When you withdraw it in retirement, you pay income tax on the full amount. This works well if you expect to be in a lower tax bracket in retirement than you are now.

With a Roth IRA, you contribute money you have already paid taxes on. The money grows without being taxed each year. When you withdraw it in retirement, you pay no tax at all—not on the original contribution and not on the growth. This works well if you expect to be in a higher tax bracket in retirement, or if you simply want the certainty of knowing you will not owe taxes later.

Both accounts have the same annual contribution limits and the same early withdrawal penalties. The choice between them is about your tax situation now versus your expected tax situation in retirement. If you are unsure, many people open both and split their contributions, though you cannot contribute more than the annual limit across both accounts combined.

How much you can contribute each year

The government sets an annual limit on how much you can put into an IRA. This limit changes most years. For the 2024 tax year, the limit is $7,000 if you are under 50 years old, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution).

The limit applies to your total contributions across all IRAs you own. If you have both a Traditional IRA and a Roth IRA, you cannot put $7,000 in each—you can put $7,000 total across both. You can divide it however you want, but the combined total cannot exceed the limit.

You can contribute to an IRA as long as you have earned income that year. If you did not work or had no income, you cannot contribute. You have until the tax filing deadline—usually April 15 of the following year—to make contributions for the previous tax year.

What happens if you withdraw money before retirement

The government penalizes early withdrawals because IRAs are meant to stay locked up until you reach 59½. If you withdraw money before that age, you owe a 10 percent penalty on the amount you withdraw, plus you have to pay income tax on it as well.

There are a few exceptions where you can withdraw without the 10 percent penalty. These include a first-time home purchase (up to $10,000 lifetime), certain medical expenses, disability, and a few other narrow situations. Even with these exceptions, you still owe income tax on the withdrawal—the penalty is waived, but the tax is not.

With a Roth IRA, the rules are slightly different. You can always withdraw your original contributions without penalty or tax. You can only withdraw the growth (earnings) penalty-free after age 59½ and after the account has been open for at least five years. This makes a Roth IRA slightly more flexible if you think you might need access to your money.

Where you open an IRA and what you invest in

You can open an IRA at any bank, credit union, brokerage firm, or insurance company. The institution does not matter much—what matters is the account type (Traditional or Roth) and what you put inside it.

Inside an IRA, you can hold cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other investments, depending on where you open it. A bank IRA might hold only savings accounts or CDs. A brokerage IRA can hold individual stocks and funds. You control what goes inside—the IRA is just the tax-advantaged wrapper around whatever investments you choose.

When you open an IRA, the institution will ask you to name a beneficiary—the person who inherits the account if you die. You can change this at any time. The beneficiary does not have to be a family member.

Income limits that affect Roth IRAs

Traditional IRAs have no income limit—anyone with earned income can open one and contribute. Roth IRAs do have income limits, and if you earn above a certain amount, you cannot contribute to a Roth directly.

These income limits change each year and depend on your filing status (single, married filing jointly, etc.). For 2024, if you are single and earn more than $146,000, you cannot contribute to a Roth IRA. If you are married filing jointly, the limit is $230,000. These are phase-out ranges, meaning your contribution amount shrinks as you approach the limit.

If you earn too much for a Roth, you can still open a Traditional IRA. Some people also use a strategy called a "backdoor Roth," where they contribute to a Traditional IRA and then convert it to a Roth, but this involves tax complications and is not the right move for everyone.

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

An IRA is different from a 401(k) or other employer retirement plan. An IRA is your own account that you open and manage. A 401(k) is offered by your employer, and your employer often contributes matching money. The contribution limits are much higher for a 401(k)—$23,500 in 2024 versus $7,000 for an IRA.

You can have both. Many people have a 401(k) through work and also open an IRA on their own. If you have a 401(k), you can still contribute to a Traditional IRA, though the tax deduction may be limited depending on your income. You can also contribute to a Roth IRA regardless of whether you have a 401(k).

If you leave a job, you can roll the money from your 401(k) into an IRA. This is called a rollover, and it lets you keep the money in a tax-advantaged account without triggering taxes or penalties. Many people do this when they change jobs.

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 three Traditional IRAs and contribute $3,000 to each, you have exceeded the limit and owe a penalty on the excess.

What happens to my IRA if I die?

Your beneficiary inherits the account. They can either withdraw all the money at once, roll it into their own IRA, or take distributions over time, depending on the rules and their relationship to you. The rules changed in 2023, so check with the institution holding your IRA for current rules.

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

With a Traditional IRA, you can withdraw up to $10,000 penalty-free for a first-time home purchase, though you still owe income tax on it. With a Roth IRA, you can withdraw your original contributions anytime without penalty or tax. The rules are different, so check which type you have.

Do I have to take money out of my IRA at some point?

Yes. Starting at age 73, you must take required minimum distributions (RMDs) from a Traditional IRA each year. Roth IRAs do not require distributions during your lifetime, but your beneficiaries will have to take distributions after you die. The amount depends on your age and account balance.

What if I made a mistake and contributed too much to my IRA?

You can withdraw the excess contribution and any earnings on it before the tax filing deadline. You will owe tax on the earnings, but not a penalty if you correct it in time. If you do not correct it, you owe a 6 percent penalty each year the excess sits in the account.