An IRA is a tax-advantaged account you open at a bank or brokerage to save for retirement

An IRA (Individual Retirement Account) is a savings or investment account with special tax rules designed to encourage you to set money aside for retirement. You open it yourself—not through an employer—at a bank, credit union, brokerage firm, or insurance company. The account holds cash, stocks, bonds, mutual funds, or other investments depending on where you open it and what you choose to buy.

The main reason to use an IRA instead of a regular savings account is the tax benefit. Money you put in may reduce your taxable income for the year, or the money inside may grow without being taxed each year. When you withdraw the money in retirement, you pay income tax on it then. This structure lets your savings grow larger over time because you are not paying taxes on the growth every year.

You can open an IRA at almost any financial institution—your bank, an online brokerage like Fidelity or Vanguard, a credit union, or a robo-advisor. The process takes 15 to 30 minutes online or in person. You choose how much to contribute each year (up to a legal limit that changes annually), and you decide what to invest the money in if the account is an investment IRA rather than a simple savings IRA.

Key Takeaways

  • An IRA is a retirement savings account you open yourself, not through your job, and it offers tax breaks that regular savings accounts do not.
  • You can open an IRA at a bank, brokerage, credit union, or insurance company, and you control how much you contribute each year up to the legal limit.
  • The two main types are Traditional IRAs (where contributions may be tax-deductible now) and Roth IRAs (where withdrawals in retirement are tax-free).
  • You cannot withdraw money before age 59½ without a penalty in most cases, which is why an IRA is meant for long-term retirement savings, not emergency funds.

How contributions and tax deductions work

When you put money into a Traditional IRA, you may be able to deduct that contribution from your income taxes for the year you make it. For example, if you earn $50,000 and contribute $5,000 to a Traditional IRA, you might report only $45,000 as taxable income. This deduction phases out if your income is high enough or if you have access to a workplace retirement plan like a 401(k), but many people may have access to for at least a partial deduction.

With a Roth IRA, you do not get a tax deduction when you contribute. You put in money you have already paid taxes on. The trade-off is that when you withdraw the money in retirement, you owe no income tax on it—not on the original contributions and not on the growth. This makes a Roth useful if you expect to be in a higher tax bracket later or if you simply prefer to pay taxes now rather than in retirement.

The annual contribution limit is the same for both types. For 2024, you can contribute up to $7,000 per year if you are under 50, or $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution). These limits change periodically, so check the IRS website or your financial institution for the current year's limit.

The difference between Traditional and Roth IRAs

A Traditional IRA lets you deduct contributions from your taxes now, but you pay income tax on withdrawals in retirement. You must start taking withdrawals at age 73 (as of 2023; this age has been rising gradually). This account works well if you expect your income to be lower in retirement than it is now, or if you want to reduce your taxable income this year.

A Roth IRA offers no tax deduction for contributions, but your withdrawals in retirement are completely tax-free. You are not required to take withdrawals at any age, so your money can keep growing. You can also withdraw your original contributions (not the growth) at any time without penalty. A Roth is useful if you are young, expect higher income later, or want tax-free growth over decades.

Income limits apply to Roth IRAs—if you earn above a certain threshold, you cannot contribute directly to a Roth. Traditional IRAs have no income limit for contributions, though the tax deduction phases out if you have high income and a workplace retirement plan. Both accounts have the same $7,000 or $8,000 annual limit, and both penalize early withdrawals before age 59½ with a 10% penalty plus income tax on the amount withdrawn.

What you can and cannot do with an IRA

An IRA is meant to stay invested until retirement. If you withdraw money before age 59½, you typically owe a 10% early withdrawal penalty plus income tax on the amount. There are narrow exceptions—you can withdraw without penalty for a first home purchase (up to $10,000 lifetime), certain medical expenses, disability, or a few other hardships—but these are limited and require documentation.

You can move money between IRAs without penalty through a process called a rollover or transfer. If you leave a job with a 401(k), you can roll that balance into an IRA. You can also convert a Traditional IRA to a Roth IRA, though you will owe income tax on the amount converted in that year. These moves do not count against your annual contribution limit.

You cannot borrow from an IRA the way you can from a 401(k). You also cannot use an IRA as collateral for a loan. The account is meant to sit and grow until you reach retirement age, which is why it is not the right place for money you might need in the next few years.

Where to open an IRA and what it costs

You can open an IRA at a traditional bank, an online bank, a brokerage firm, a credit union, or through a robo-advisor. Banks and credit unions typically offer IRAs that hold savings accounts or CDs (certificates of deposit), which are safe but earn low interest. Brokerages like Fidelity, Charles Schwab, E-Trade, and Vanguard let you invest in stocks, bonds, and mutual funds, which offer higher growth potential but also risk.

Many institutions charge no fee to open or maintain an IRA. Some charge annual maintenance fees (typically $25 to $50) if your balance falls below a minimum, though many waive this if you set up automatic contributions. If you invest in mutual funds or stocks, you may pay trading fees or expense ratios (the annual cost of owning a fund), but these vary widely by institution and fund choice.

The best choice depends on how much you want to invest and how hands-on you want to be. A simple savings IRA at your bank is straightforward and safe. A brokerage IRA gives you more investment options but requires you to make choices about what to buy. A robo-advisor splits the difference—it invests your money automatically based on your age and risk tolerance, with minimal fees.

How an IRA fits into your overall retirement plan

An IRA is one tool among several for retirement savings. If your employer offers a 401(k) or similar plan, you may want to contribute there first, especially if they match your contributions—that match is assistance programs. Once you have taken full advantage of an employer match, an IRA is often the next best place to save because of its tax benefits and flexibility.

You can have both an IRA and a 401(k) at the same time. Some people max out their 401(k) and then contribute to an IRA. Others use an IRA as their only retirement account if they are self-employed or do not have access to a workplace plan. The key is to save consistently in whichever accounts are available to you.

An IRA should not be your only emergency fund. Keep three to six months of expenses in a regular savings account that you can access without penalty. Once that is in place, an IRA is an excellent place to put additional retirement savings because the tax benefits compound over decades.

Frequently Asked Questions

Can I have more than one IRA?

Yes, you can have multiple IRAs at different institutions. However, your total contributions across all IRAs in a single year cannot exceed the annual limit ($7,000 or $8,000 depending on age). If you have both a Traditional and a Roth IRA, the limit applies to your combined contributions to both accounts.

What happens to my IRA if I die?

Your IRA passes to your beneficiary—usually a spouse, child, or other person you named when you opened the account. The beneficiary inherits the account and can continue to hold it or withdraw the balance. The rules for inherited IRAs vary depending on your relationship to the deceased and the type of IRA, so your beneficiary should contact the financial institution for guidance.

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

With a Traditional IRA, you can withdraw up to $10,000 lifetime for a first-time home purchase without the 10% early withdrawal penalty, though you still owe income tax on the amount. With a Roth IRA, you can withdraw your original contributions at any time without penalty or tax. Check with your IRA provider about the specific process for your account.

What is the difference between an IRA and a 401(k)?

An IRA is an account you open yourself; a 401(k) is offered by your employer. A 401(k) typically has higher contribution limits and may include an employer match. An IRA offers more investment choices and flexibility. You can have both at the same time.

Do I have to invest my IRA money in stocks?

No. You can keep your IRA in a savings account, money market account, or CDs at a bank. You can also invest in stocks, bonds, mutual funds, or other securities at a brokerage. The choice depends on your comfort level with risk and how much growth you want to pursue over time.