An IRA is a savings account the government lets you use to set aside money for retirement, with tax advantages you don't get from a regular bank account

IRA stands for Individual Retirement Account. It is a specific type of account you open at a bank, credit union, or investment firm—not a government program you apply to. The government created IRAs to encourage people to save for retirement by offering tax breaks: depending on which type of IRA you choose, you either pay no taxes on the money you put in, or you pay no taxes on the money that grows inside the account.

The catch is that the government expects you to leave the money alone until you turn 59½. If you take money out before then, you usually owe a 10 percent penalty on top of income taxes. The account itself is just a container—you decide what to put inside it, whether that is cash sitting in a savings account, stocks, bonds, or mutual funds.

Key Takeaways

  • An IRA is a retirement savings account you open yourself at a bank or investment firm, not a government benefit you request.
  • The two most common types are Traditional IRAs, where you may deduct contributions from your taxes now, and Roth IRAs, where you pay taxes now but withdraw money tax-free later.
  • You can contribute a limited amount each year—the limit changes annually and depends on your age and income.
  • Money withdrawn before age 59½ usually triggers a 10 percent penalty plus income taxes, with narrow exceptions for hardship.
  • You choose what to invest the money in; the IRA is just the account structure that gives you the tax advantage.

Traditional IRA vs. Roth IRA: The main difference is when you pay taxes

A Traditional IRA lets you deduct your contributions from your income taxes in the year you make them—if you earn $50,000 and put $6,500 into a Traditional IRA, you may report only $43,500 as taxable income that year. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount you take out. This works well if you expect to be in a lower tax bracket in retirement than you are now.

A Roth IRA works backward. You contribute money that you have already paid taxes on—no deduction now. But the money grows tax-free, and when you withdraw it in retirement, you owe no taxes at all. 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.

The choice between them depends on your current income, your expected retirement income, and how long you have until retirement. Neither is universally better; they are built for different situations.

How much you can contribute each year

The government sets an annual limit on how much you can put into an IRA. The limit changes most years and is higher if you are 50 or older. For 2024, the limit is $7,000 for people under 50 and $8,000 for people 50 and older. For 2025, it is $7,000 and $8,000 respectively, though you should check the current year's limit when you open your account, since it may have changed.

This 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 annual limit. You can contribute less than the limit, or nothing in a given year. You cannot carry over unused room from one year to the next.

For a Roth IRA specifically, there is also an income limit. If you earn above a certain amount, you cannot contribute to a Roth IRA at all, though you can still use a Traditional IRA. The income limits change yearly and depend on whether you file taxes as single or married.

When you can take money out without a penalty

The standard rule is that you cannot withdraw money before age 59½ without owing a 10 percent penalty plus income taxes on the withdrawal. But there are narrow exceptions. You can withdraw without penalty for a first-time home purchase (up to $10,000 lifetime), to pay for education expenses, to cover medical insurance if you are unemployed, or to pay medical expenses that exceed 7.5 percent of your adjusted gross income.

For Roth IRAs only, you can always withdraw the money you contributed (not the growth) without penalty, at any age. This makes a Roth IRA slightly more flexible if you think you might need access to your own contributions before retirement.

At age 73, the government requires you to start taking money out of a Traditional IRA whether you want to or not—these are called Required Minimum Distributions, or RMDs. Roth IRAs do not have this requirement during your lifetime, which is another reason some people prefer them.

How to open an IRA

You open an IRA the same way you open any bank account: you choose a bank, credit union, or investment firm, fill out paperwork with your name and Social Security number, and fund the account. You can open one online in minutes at most major banks and brokerages.

When you open the account, you will choose whether it is a Traditional or Roth IRA. You will also decide what to invest the money in—some people keep it in a savings account earning interest, while others buy stocks or mutual funds. The institution you choose will walk you through these decisions, though you may want to think about your risk tolerance and time horizon before you start.

You can open an IRA even if you have a 401(k) at work, though there are income limits on deducting Traditional IRA contributions if you do. You can also open multiple IRAs at different institutions, as long as your total contributions across all of them do not exceed the annual limit.

IRAs vs. other retirement accounts

An IRA is one tool among several for retirement savings. If your employer offers a 401(k), that is a different account with higher contribution limits but less flexibility in what you can invest in. Some people use both: they contribute to their employer's 401(k) up to the match, then max out an IRA, then go back to the 401(k) if they have more to save.

A regular savings account or investment account has no contribution limits and no tax advantages, but you can withdraw money anytime without penalty. An IRA trades that flexibility for tax breaks, which makes sense if you genuinely will not need the money until retirement.

If you are self-employed, you may be able to open a SEP IRA or Solo 401(k), which allow much higher contributions than a standard IRA. These are designed for people with business income rather than W-2 wages.

What happens to an IRA when you die

When you open an IRA, you name a beneficiary—the person or people who will inherit the account if you die. The beneficiary receives the account outside of probate, meaning it transfers directly without going through the court system.

The beneficiary will owe income taxes on withdrawals from a Traditional IRA, but not from a Roth IRA. If the beneficiary is your spouse, they have the option to treat the IRA as their own and delay withdrawals. If the beneficiary is not your spouse, they must begin withdrawals within a certain timeframe, depending on their relationship to you and the rules in place when you die.

You can change your beneficiary at any time by contacting the institution where your IRA is held. If you do not name a beneficiary, the account goes to your estate, which complicates things for your heirs.

Frequently Asked Questions

Can I have both a Traditional IRA and a Roth IRA?

Yes, you can open both. Your combined contributions to both accounts cannot exceed the annual limit—if you put $3,000 in a Traditional IRA, you can only put $4,000 in a Roth IRA that year (assuming the limit is $7,000). Many people use both to split their tax situation: they contribute to a Traditional IRA for the immediate deduction, and to a Roth IRA for tax-free growth later.

What if I need the money before 59½?

You can withdraw it, but you will owe a 10 percent penalty plus income taxes on the amount, unless you may have access to for one of the exceptions—first-time home purchase, education, medical hardship, or unemployment. For a Roth IRA, you can always withdraw your own contributions penalty-free. The penalty is steep enough that early withdrawal should be a last resort, not a plan.

Do I have to contribute the maximum amount every year?

No. You can contribute any amount up to the limit, including zero. If you have a low-income year, you might contribute less. If you have a high-income year, you might max it out. There is no requirement to contribute consistently or at all.

Can I open an IRA if I am self-employed?

Yes, but you may want to look at a SEP IRA or Solo 401(k) instead, since they allow much higher contributions based on your business income. A regular IRA has the same contribution limits whether you are self-employed or not, so a SEP IRA is usually a better choice for someone with significant self-employment income.

What if my income is too high for a Roth IRA?

You can still open a Traditional IRA and contribute to it. You can also do a "backdoor Roth" conversion, which involves contributing to a Traditional IRA and then converting it to a Roth, though this has tax implications you should discuss with a tax professional before attempting it.