An IRA is a retirement savings account the government lets you open on your own, with tax breaks built in

An Individual Retirement Account (IRA) is a savings account designed specifically for retirement. You open it yourself—not through an employer—and the money you put in gets tax advantages that regular savings accounts don't have. The government created IRAs to encourage people to save for retirement by making it cheaper to do so.

The basic idea is simple: you contribute money, that money grows over time through investments, and you withdraw it after age 59½. The tax break comes in two forms depending on which type of IRA you choose. With a Traditional IRA, you may deduct your contributions from your taxes in the year you make them, and you pay taxes later when you withdraw. With a Roth IRA, you contribute money that's already been taxed, but the money grows tax-free and you pay no taxes on withdrawals in retirement.

You don't need an employer to open an IRA. You can open one at a bank, a brokerage firm, or an investment company. The account is yours alone—it stays with you if you change jobs, and you control what happens to the money inside it.

Key Takeaways

  • An IRA is a personal retirement savings account you open yourself, separate from any employer plan, with tax advantages built in.
  • Traditional IRAs let you deduct contributions now and pay taxes when you withdraw in retirement; Roth IRAs let you contribute after-tax money but withdraw tax-free later.
  • You can contribute a limited amount each year—the limit changes annually and depends on your age and income.
  • You cannot withdraw money before age 59½ without a penalty, except in rare circumstances like a first-time home purchase or medical hardship.
  • An IRA is portable: it moves with you between jobs and stays in your name for life.

How much you can put in each year

The IRS sets an annual contribution limit for IRAs. For 2024, you can contribute up to $7,000 per year if you're under 50, or $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 current year's limit before you contribute.

Your income can also affect how much you're allowed to contribute, especially with a Roth IRA. If your income is above a certain threshold, your Roth contribution limit phases out. Traditional IRAs don't have income limits on contributions, but if you're covered by an employer retirement plan and your income is high enough, you may not be able to deduct your contribution on your taxes.

You can contribute to an IRA only if you have earned income—money from a job or self-employment. You cannot contribute if your only income is from investments, Social Security, or unemployment benefits.

Traditional IRA versus Roth IRA: the main difference

The difference between these two comes down to when you pay taxes. A Traditional IRA gives you a tax deduction now. If you contribute $5,000, you may reduce your taxable income by $5,000 in that year. You pay no taxes on the growth inside the account. But when you withdraw money in retirement, every dollar comes out as taxable income.

A Roth IRA works the opposite way. You contribute money you've already paid taxes on, so you get no deduction now. The money grows tax-free inside the account. When you withdraw in retirement, you owe no taxes on any of it—not on your contributions and not on the growth. This makes Roth accounts especially valuable if you expect to be in a higher tax bracket in retirement, or if you want to leave money to heirs without triggering a tax bill.

Roth accounts also have more flexibility: you can withdraw your contributions (not the growth) before retirement without penalty, which makes them useful as an emergency backup. Traditional IRAs penalize early withdrawals more strictly.

What you can invest the money in

An IRA is just a container—the money inside it can be invested in stocks, bonds, mutual funds, exchange-traded funds (ETFs), or kept in cash. Some IRAs also allow real estate or other alternative investments, depending on the institution holding the account.

The institution where you open your IRA—your bank, brokerage, or investment company—will show you the investment options available to you. You choose how to invest the money, and you can change those investments whenever you want. The growth (or loss) on those investments is what builds your retirement nest egg.

If you don't want to pick individual investments, many institutions offer target-date funds, which automatically adjust from stocks to bonds as you get closer to retirement. These are a common choice for people who want a simple, hands-off approach.

When you can take the money out

You can withdraw money from an IRA after age 59½ without penalty. Before that age, withdrawals are generally penalized 10% on top of income taxes owed. There are exceptions—first-time home purchases (up to $10,000 lifetime), medical expenses, disability, and a few others—but these are narrow and require documentation.

Starting at age 73, you must begin taking Required Minimum Distributions (RMDs) from a Traditional IRA each year. The IRS calculates the amount based on your age and account balance. Roth IRAs have no RMD requirement during your lifetime, which is another reason some people prefer them.

If you withdraw before 59½ without a may have access to exception, you'll owe both income tax on the withdrawal and a 10% early withdrawal penalty. For example, a $5,000 withdrawal at age 45 could cost you $500 in penalty plus income tax on the full $5,000.

How an IRA fits with employer retirement plans

An IRA is separate from any 401(k) or other employer plan you might have. You can have both at the same time. Many people do: they contribute to their employer's 401(k) to get a company match, then open an IRA for additional retirement savings.

If you leave a job, you can roll over the money from your employer's 401(k) into an IRA. This is called a rollover, and it lets you consolidate retirement savings and often gives you more investment choices. A rollover is not a taxable event if you do it correctly—the money moves directly from the old plan to the new IRA.

If your employer doesn't offer a retirement plan, an IRA becomes your main tool for tax-advantaged retirement saving. Self-employed people can also open a SEP IRA or Solo 401(k), which allow much higher contributions than a regular IRA.

Opening an IRA and getting started

Opening an IRA takes less than an hour. You choose a financial institution—a bank, brokerage like Fidelity or Vanguard, or an online investment platform—and fill out an application. You'll provide your name, Social Security number, address, and employment information. Most institutions let you open an account online.

Once the account is open, you transfer money into it and decide how to invest it. You can set up automatic monthly contributions if you want to build the habit of regular saving. You can also contribute a lump sum once a year, as long as you stay within the annual limit.

Keep records of your contributions, especially for a Roth IRA. The IRS doesn't track this automatically, and you'll need proof of how much you contributed versus how much grew, particularly if you withdraw before retirement.

Frequently Asked Questions

Can I have more than one IRA?

Yes, you can have multiple IRAs, but your total contributions across all of them cannot exceed the annual limit. For example, if the limit is $7,000, you could split that between two IRAs ($3,500 each) or put it all in one. The limit is per person, not per account.

What happens to my IRA if I die?

Your IRA passes to whoever you named as the beneficiary. They can inherit the account and continue it, or withdraw the money. The tax treatment depends on the type of IRA and the beneficiary's relationship to you. Naming a beneficiary is one of the most important steps when you open an account.

Can I withdraw from my IRA to buy a house?

With a Roth IRA, you can withdraw your contributions anytime without penalty. With a Traditional IRA, you can withdraw up to $10,000 lifetime for a first-time home purchase, but you'll owe income tax on it. This is a narrow exception and should be a last resort, since you're reducing your retirement savings.

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

A 401(k) is offered by your employer; an IRA you open yourself. 401(k)s usually have higher contribution limits and may include employer matching. IRAs give you more control over investments and are portable between jobs. Many people use both.

Do I need earned income to open an IRA?

Yes, you must have earned income from a job or self-employment to contribute to an IRA. Income from investments, Social Security, or pensions doesn't count. A spouse with no income can open a spousal IRA if their partner has earned income, but the contribution still comes from the working spouse's earnings.