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. The basic idea is simple: you put money in, it grows over time, and you take it out after you turn 59½. The government created IRAs to encourage people to save for retirement by offering tax breaks — either by letting you deduct contributions from your income taxes now, or by letting the money grow tax-free and taking it out tax-free later.

You open an IRA through a bank, credit union, brokerage firm, or investment company. It's not a government account — the financial institution you choose holds the money and invests it according to your instructions. You control what goes in and what it's invested in. The government just sets the rules about how much you can put in each year, when you can take it out, and what the tax treatment is.

Key Takeaways

  • An IRA is a retirement savings account that offers tax advantages — either reducing your taxes now or letting your money grow tax-free until retirement.
  • You open an IRA with a bank, brokerage, or investment company, and you decide how much to contribute each year (within government limits) and how to invest the money.
  • The two main types are Traditional IRAs, where contributions may be tax-deductible now, and Roth IRAs, where contributions are not deductible but withdrawals in retirement are tax-free.
  • You generally cannot withdraw money before age 59½ without paying a penalty, though some exceptions exist for hardship situations.
  • Annual contribution limits change year to year and depend on your age — the IRS publishes the current limit each January.

Traditional IRA vs. Roth IRA: The Two Main Types

The two most common IRAs work in opposite directions on taxes. With a Traditional IRA, you may deduct your contribution from your income taxes in the year you make it — so if you earn $50,000 and contribute $5,000 to a Traditional IRA, you might only owe taxes on $45,000. 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.

A Roth IRA works the other way. You contribute money that has already been taxed — you don't get a deduction now. But the money grows tax-free, and when you withdraw it in retirement, you owe no taxes on it at all. This means if your Roth IRA grows from $10,000 to $100,000, you take out the full $100,000 tax-free.

Which one makes sense depends on whether you think your tax rate will be higher or lower in retirement than it is now. If you expect to earn less in retirement, a Traditional IRA saves you more money overall. If you expect to earn the same or more, or if you simply want to lock in today's tax rate, a Roth IRA is often the better choice. Many people use both.

How Much You Can Contribute Each Year

The government sets an annual limit on how much you can put into an IRA. This limit changes most years — the IRS announces the new limit in January. For 2024, the limit is $7,000 if you're under 50 years old, and $8,000 if you're 50 or older (the extra $1,000 is called a "catch-up contribution").

You can split this limit between a Traditional IRA and a Roth IRA if you have both — so you might put $4,000 in a Traditional IRA and $3,000 in a Roth IRA in the same year. But your total across all IRAs cannot exceed the annual limit.

You don't have to contribute the full amount every year. You can contribute less, or nothing at all in a year when money is tight. There's no penalty for not contributing. The only requirement is that if you have a Traditional IRA, you must start taking withdrawals at age 73 (this age changed in 2023 under the SECURE 2.0 Act).

How Money Grows Inside an IRA

Once money is in your IRA, you decide how to invest it. Most people invest in stocks, bonds, mutual funds, or exchange-traded funds (ETFs) through the financial institution that holds their account. Some people keep their IRA in a savings account earning interest, though this is less common because the returns are usually lower.

The key tax advantage is that any gains — whether from stock price increases, dividends, or interest — are not taxed each year the way they would be in a regular investment account. In a regular brokerage account, you owe taxes on dividends and capital gains every year. In an IRA, those taxes are deferred (in a Traditional IRA) or eliminated entirely (in a Roth IRA).

This tax-free or tax-deferred growth is what makes IRAs powerful for long-term saving. Money that would otherwise go to taxes stays in the account and compounds over decades.

When You Can Withdraw Money

The general rule is that you cannot withdraw money from an IRA before age 59½ without paying a 10% penalty on top of income taxes (in a Traditional IRA). This penalty exists to discourage people from raiding their retirement savings early.

However, there are exceptions. You can withdraw money early without the penalty in certain situations: if you become permanently disabled, if you're paying for unreimbursed medical expenses above a certain threshold, if you're paying health insurance premiums while unemployed, or if you're a first-time homebuyer taking out up to $10,000 for a down payment. Roth IRAs have a few additional exceptions because you contributed after-tax money.

Once you turn 59½, you can withdraw as much as you want whenever you want, with no penalty. In a Traditional IRA, you'll owe income tax on the withdrawal. In a Roth IRA, you owe no tax (as long as the account has been open for at least five years).

Who Can Open an IRA

You can open an IRA if you have earned income — money from a job or self-employment. You cannot open an IRA if your only income is from investments, Social Security, or unemployment benefits. You must be under age 73 to contribute to a Traditional IRA (though you can still hold one and withdraw from it). There are no age limits for opening or contributing to a Roth IRA.

For a Roth IRA, there are income limits. If you earn above a certain amount, you cannot contribute directly to a Roth IRA. These limits change each year and vary depending on whether you're single or married. For 2024, single filers begin to phase out at $146,000 and cannot contribute at all above $161,000. Married couples filing jointly begin to phase out at $230,000 and cannot contribute above $240,000. If your income exceeds these limits, you may still be able to use a "backdoor Roth" strategy, though that involves more complex steps.

Where 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. Each institution offers different investment options and may charge different fees, so it's worth comparing before you choose.

When you open an IRA, you'll fill out a form naming a beneficiary — the person who inherits the account if you die. You'll also choose whether you want a Traditional or Roth IRA (or both). Then you'll decide how to invest the money: in stocks, bonds, mutual funds, ETFs, or a savings account, depending on what the institution offers.

Opening an IRA is straightforward and usually takes 15 to 30 minutes online. You'll need your Social Security number, a valid ID, and proof of address. Once it's open, you can contribute money by transferring it from your bank account or by having your employer deposit money directly into it.

Frequently Asked Questions

Can I have more than one IRA?

Yes. You can have multiple Traditional IRAs, multiple Roth IRAs, or both. However, your total contributions across all IRAs in a single year cannot exceed the annual limit — so if you have two Roth IRAs, you might split a $7,000 contribution between them, but you cannot contribute $7,000 to each one.

What happens if I withdraw money before 59½?

You'll owe income tax on the withdrawal plus a 10% penalty in most cases. For example, if you withdraw $5,000 from a Traditional IRA at age 40, you might owe $1,500 in taxes and penalties combined. Some exceptions exist for disability, medical expenses, and first-time home purchases, but these are narrow.

Can I move money from one IRA to another?

Yes. You can transfer money between IRAs at different institutions, or convert a Traditional IRA to a Roth IRA (though this creates a tax bill in the year you convert). You can also do a "rollover" if you leave a job — moving money from your employer's retirement plan into an IRA.

Do I have to invest the money in stocks?

No. You can keep an IRA in a savings account, money market account, or certificates of deposit (CDs) if you want. The tax advantage works the same way. However, savings accounts and CDs typically earn lower returns than stocks or bonds over long periods, so most people invest in a mix of stocks and bonds.

What if I don't use all my contribution room in a year?

You cannot carry unused contribution room forward to the next year. If you can contribute $7,000 in 2024 but only contribute $5,000, you lose the ability to contribute that extra $2,000. However, you can always contribute in future years up to that year's limit.