An IRA is a retirement savings account that gives you tax breaks on the money you put in

An IRA (Individual Retirement Account) is a bank or investment account designed specifically for retirement savings. The government lets you put money into it and get a tax break — either by deducting what you contribute from your income taxes that year, or by letting the money grow tax-free until you withdraw it in retirement. You choose how to invest the money inside the account (stocks, bonds, mutual funds, or just keep it in cash), and you control when and how much you contribute each year, within limits set by the IRS.

The main reason to use an IRA instead of a regular savings account is the tax advantage. Without an IRA, if you earn interest or investment gains, you owe taxes on that money every year. Inside an IRA, that growth is either tax-deferred (you pay taxes later, when you withdraw) or tax-free (you never pay taxes on it). Over decades, that difference compounds into real money.

Key Takeaways

  • An IRA lets you save for retirement with a tax advantage — either a deduction now or tax-free growth later, depending on the type.
  • You can open an IRA at a bank, brokerage, or credit union, and you control how the money is invested.
  • There are annual contribution limits (the amount changes each year), and you generally cannot withdraw money before age 59½ without a penalty.
  • The two main types are Traditional IRAs (tax deduction now, taxes on withdrawal later) and Roth IRAs (no deduction now, tax-free withdrawal later).
  • An IRA is separate from employer retirement plans like a 401(k), though you can have both.

Traditional IRA vs. Roth IRA: The two main types

A Traditional IRA lets you deduct your contribution from your income taxes in the year you make it. If you earn $50,000 and contribute $6,500 to a Traditional IRA, you report only $43,500 as taxable income. The money grows tax-free inside the account, but when you withdraw it in retirement, you pay income tax on the full amount you take out — both your original contribution and all the growth.

A Roth IRA works the opposite way. You contribute money that has already been taxed (no deduction on your tax return), but the money grows tax-free, and when you withdraw it in retirement, you owe no taxes on any of it — not on your contributions, not on the growth. The trade-off is that you give up the tax break now to get a bigger one later.

Which one makes sense depends on your income now versus what you expect in retirement. If you think you will be in a lower tax bracket when you retire, a Traditional IRA saves you more money overall. If you think you will be in the same bracket or higher, a Roth is usually better. Many people use both.

How much you can contribute each year

The IRS sets an annual limit on how much you can put into an IRA. The limit changes most years based on inflation. For 2024, you can contribute up to $7,000 to an IRA (either Traditional or Roth, or split between them). If you are age 50 or older, you can contribute an extra $1,000 as a "catch-up" contribution, for a total of $8,000.

You can contribute less than the limit, or nothing in a given year — there is no requirement to contribute. But you cannot contribute more than the limit, and you cannot contribute more than you earned in income that year. If you are married and file jointly, your spouse can open their own IRA and contribute separately, up to the same limit.

When you can withdraw money without a penalty

IRAs are designed for retirement, so the IRS discourages early withdrawal. If you withdraw money before age 59½, you generally owe a 10% penalty on top of income taxes (on a Traditional IRA) or just the 10% penalty (on a Roth IRA, if you are withdrawing growth rather than your own contributions). There are a few exceptions — first-time home purchase (up to $10,000 lifetime), medical expenses, disability, and a few others — but they are narrow.

At age 73, the IRS requires you to start taking money out of a Traditional IRA, whether you need it or not. These are called Required Minimum Distributions (RMDs), and the amount is calculated based on your age and account balance. Roth IRAs do not have RMDs during your lifetime, which is one reason some people prefer them.

Where to open an IRA and what it costs

You can open an IRA at almost any bank, credit union, or investment brokerage. Common places include Vanguard, Fidelity, Charles Schwab, your local bank, or online brokers. There is no single "IRA" you open — you open an account at a specific institution, tell them whether you want a Traditional or Roth IRA, and then fund it.

Most institutions charge no fee to open or maintain an IRA. Some charge a small annual fee (often $10 to $25) if your balance is below a certain amount, or they may charge fees for specific investments you choose inside the account. Read the fee schedule before you open the account so there are no surprises.

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

An IRA is an individual account you open on your own. A 401(k) is a retirement plan offered by your employer. If your employer offers a 401(k), they may match a portion of what you contribute (assistance programs), and the contribution limits are much higher than an IRA — $23,500 in 2024, versus $7,000 for an IRA. However, you can have both: contribute to your employer's 401(k) and also open and fund an IRA on your own.

If you are self-employed or own a small business, you cannot use a 401(k) unless you set one up yourself, which is expensive. Instead, you might use a SEP IRA or Solo 401(k), which are designed for self-employed people and allow much higher contributions than a regular IRA.

What happens to an IRA if you change jobs

An IRA is yours alone — it is not tied to your employer. If you leave a job, your IRA stays with you. You do not have to do anything to it. If your employer had a 401(k) and you want to move that money into an IRA, you can do a rollover: the 401(k) provider sends the money directly to your IRA (at the same or a different institution), and you owe no taxes or penalties as long as it arrives within 60 days.

This rollover process is a common way people consolidate retirement savings from multiple jobs into one IRA. You maintain control of the money throughout the transfer, and you can choose a new institution if you want different investment options or lower fees than your previous employer's plan offered.

Frequently Asked Questions

Can I have more than one IRA?

Yes. You can open multiple IRAs at different institutions, and you can have both a Traditional and a Roth IRA. However, your total contributions across all IRAs cannot exceed the annual limit — if you contribute $4,000 to one Traditional IRA and $3,500 to a Roth IRA, you have hit the limit and cannot contribute more that year.

What if I earn too much money to contribute to a Roth IRA?

Roth IRA contributions are limited based on your income. If you earn above a certain threshold (the amount varies by filing status and changes yearly), you cannot contribute to a Roth directly. However, you can use a strategy called a "backdoor Roth" to convert a Traditional IRA into a Roth, though this has tax implications you should discuss with a tax professional.

Do I have to invest the money in stocks?

No. You can keep IRA money in a savings account, money market fund, or certificates of deposit (CDs) if you prefer. However, most people invest in stocks, bonds, or mutual funds because the growth potential is higher over decades. The institution where you open your IRA will show you the investment options available.

What happens to my IRA when I die?

Your IRA passes to whoever you named as the beneficiary on the account. They will owe taxes on withdrawals (depending on the type of IRA and their relationship to you), but the account itself does not go through probate. Name a beneficiary when you open the account, and update it if your circumstances change.

Can I withdraw my own contributions from a Roth IRA early?

Yes. With a Roth IRA, you can withdraw the money you contributed (not the growth) at any time without penalty or taxes, because you already paid taxes on it. This is one advantage of a Roth over a Traditional IRA. However, if you withdraw the investment growth before age 59½, you owe the 10% penalty and taxes on that portion.