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

IRA stands for Individual Retirement Account. It is a container—a type of account—that holds money you save for retirement. The main reason to use one instead of a regular savings account is that the government gives you tax advantages. Depending on which kind of IRA you open, you either pay no taxes on the money you put in, or you pay no taxes on the money that grows inside the account, or both. That tax break is the whole point.

You open an IRA at a bank, credit union, or investment firm. You put money in. That money sits there, and you can invest it (buy stocks, bonds, mutual funds) or leave it in cash. When you turn 59½, you can take the money out. If you take it out before then, you usually pay a penalty. When you do take it out in retirement, you pay income tax on it—unless you chose a type of IRA where you already paid tax on the way in.

An IRA is not a job benefit. Your employer does not set it up for you. You open it yourself. If your employer offers a 401(k) or pension, that is a different thing. You can have both an IRA and an employer retirement plan at the same time.

Key Takeaways

  • An IRA is a personal retirement savings account that gives you tax breaks the government does not offer on regular savings accounts.
  • You open an IRA yourself at a bank or investment firm, not through your employer, and you decide how much to put in each year.
  • There are two main types: a Traditional IRA (where you may deduct contributions from your taxes now) and a Roth IRA (where you pay taxes now but withdraw tax-free later).
  • You cannot withdraw money penalty-free until age 59½, with a few narrow exceptions for hardship or first-time home purchase.
  • The amount you can contribute each year has a legal limit set by the IRS, which changes yearly and depends on your age.

Traditional IRA vs. Roth IRA: The Two Main Types

The two common types of IRA work in opposite directions. In a Traditional IRA, you put money in before you pay income tax on it. That means if you earn $50,000 and put $6,500 into a Traditional IRA, you may be able to deduct that $6,500 from your taxable income for the year. You pay tax later, when you take the money out in retirement. In a Roth IRA, you put money in after you have already paid income tax on it. You do not get a tax deduction now. But when you take the money out in retirement, you owe no tax on it—not on the money you put in, and not on any growth.

Which one makes sense depends on whether you think your tax rate will be higher now or in retirement. If you are young and expect to earn more later, a Roth might save you money overall. If you are older and expect to earn less in retirement, a Traditional IRA might be better now. But this is not a simple choice, and the rules have income limits and other conditions attached.

Both types have the same withdrawal penalty (10 percent, plus income tax) if you take money out before 59½. Both have the same yearly contribution limit. The difference is only in when you pay the tax.

How Much You Can Put In Each Year

The IRS sets a yearly limit on how much you can contribute to an IRA. This limit changes most years. For 2024, the limit is $7,000 if you are under 50, and $8,000 if you are 50 or older. The extra $1,000 is called a "catch-up contribution" and exists to let people save more as they get closer to retirement.

That limit applies to your total across all IRAs you own. If you have two IRAs and put $4,000 in one and $3,500 in the other, you have hit your limit. You cannot exceed it by splitting the money across accounts.

You can contribute less than the limit, or nothing at all, in any given year. But you cannot carry unused room forward. If you do not use your $7,000 limit in 2024, you cannot put in $14,000 in 2025.

When You Can Take Money Out Without Penalty

The standard rule is simple: you can withdraw money penalty-free starting at age 59½. Before that, you pay a 10 percent early withdrawal penalty on top of income tax.

There are a few exceptions. You can withdraw from a Traditional IRA without penalty if you are disabled, if you are paying for medical expenses that exceed a certain percentage of your income, or if you are paying health insurance premiums while unemployed. You can withdraw up to $10,000 once in your lifetime to buy your first home. You can also withdraw to pay for education expenses for yourself or a family member.

With a Roth IRA, the rules are slightly different. You can always withdraw the money you put in (called your "contributions") without penalty or tax, at any age. You can only withdraw the growth penalty-free after 59½ or in those same narrow exceptions.

Required Withdrawals in Retirement

Once you reach a certain age, the government requires you to start taking money out of a Traditional IRA. This is called a Required Minimum Distribution, or RMD. For most people, this starts at age 73 (the age changed in 2023). You have to take out a calculated amount each year, based on your age and account balance. If you do not take out enough, you pay a penalty.

Roth IRAs do not have required withdrawals during your lifetime. You can leave the money in as long as you want. This is one reason some people prefer them—you have more control over when to take money out.

How to Open an IRA

You can open an IRA at most banks, credit unions, and investment firms. Common places include Vanguard, Fidelity, Charles Schwab, and your own bank. The process is usually online and takes 10 to 20 minutes. You will need your Social Security number, proof of income, and a way to fund the account (a bank account to transfer from, or a check).

When you open the account, you choose whether you want a Traditional or Roth IRA. You also decide how to invest the money—in a money market fund, a savings account, stocks, bonds, or mutual funds. If you do not choose, the firm will usually put it in a default fund or a savings account.

There is no fee to open an IRA at most places. Some firms charge annual account fees, usually $10 to $25, though many waive them if you keep a minimum balance. Some charge fees only if you trade stocks frequently.

IRA vs. Other Retirement Accounts

An IRA is one tool among several. If your employer offers a 401(k), that is a different account with different rules. A 401(k) usually lets you contribute more per year (in 2024, the limit is $23,500 for people under 50). Many employers match part of what you contribute, which is assistance programs. But a 401(k) is tied to your job—if you leave, you have to roll it over or leave it behind.

A SEP IRA or Solo 401(k) is for self-employed people or small business owners. A SIMPLE IRA is for small employers. These have higher contribution limits than a regular IRA.

You can have an IRA and a 401(k) at the same time. But there are income limits on how much you can deduct from a Traditional IRA if you also have a 401(k) at work.

Frequently Asked Questions

Can I have more than one IRA?

Yes. You can own multiple IRAs at different banks or firms. But your total contributions across all of them cannot exceed the yearly limit. If you have a Traditional IRA and a Roth IRA, the $7,000 limit (or $8,000 if you are 50+) applies to both combined, not to each one separately.

What happens if I need the money before 59½?

You can withdraw it, but you will owe a 10 percent penalty plus income tax on the amount. A few exceptions exist: disability, medical hardship, first-time home purchase (up to $10,000), and education expenses. With a Roth IRA, you can withdraw your contributions (the money you put in) anytime without penalty, though not the growth.

Can I move money from one IRA to another?

Yes. You can roll over money from one IRA to another, or from a 401(k) to an IRA. This is usually tax-free if done correctly. You have 60 days to complete the transfer, or it counts as a withdrawal and you owe tax and penalty. Most firms can do this for you directly, which is safer than handling the check yourself.

Do I have to invest the money in stocks?

No. You can keep an IRA in cash, in a savings account, or in money market funds. You get the tax break either way. Many people keep part of their IRA in cash and part in stocks, depending on their age and comfort with risk.

What if I earn too much to open a Roth IRA?

Roth IRAs have income limits. If you earn above a certain amount, you cannot contribute directly to a Roth. The limit depends on your filing status and changes yearly. You can still open a Traditional IRA at any income level, though the tax deduction may be limited if you have a 401(k) at work.