What is an IRA?

What is an IRA?

An IRA, or Individual Retirement Account, is a personal retirement savings account you open yourself, not through an employer. You pick the provider and investments. The tax break is the point: money grows tax-deferred or tax-free until retirement.

How does an IRA differ from a 401(k)?

A 401(k) comes through your employer and often includes a match. An IRA is yours alone, opened with a provider of your choice, no employer involvement, no match. You control where the account lives and what it holds.

The contribution limits also differ, and an IRA generally offers a wider investment choice than a 401(k) menu. The two work together: fund your 401(k) for the match, then use an IRA for extra savings with control.

What are the types of IRAs?

There are two main types. A traditional IRA takes pre-tax money that grows tax-deferred, with taxes due on withdrawals. A Roth IRA takes after-tax dollars now for tax-free qualified withdrawals later. Your income affects how much you contribute or deduct. The core trade: defer taxes or pay them now.

An inherited (beneficiary) IRA holds an account you receive when the original owner dies. It does not let you simply let it sit. The IRS forces a drawdown, often within ten years under the SECURE Act rules.

A custodial (minor) IRA lets a child under 18 with earned income save for retirement. A parent or guardian runs the account until the child takes control. The money must come from the child's own work, not a gift.

How do you open and fund an IRA?

You open one at any major brokerage, bank, or robo-adviser, typically in minutes with no minimum. Then you choose investments and fund the account. The annual limit spans all your IRAs combined, and you can still make the prior year's contribution up to the April tax filing deadline.

What are the exact limits and rules for an IRA?

For 2026, the contribution limit is $7,500, or $8,600 if you're age 50 or older thanks to the $1,100 catch-up contribution. Your cap can't exceed your taxable compensation. Your tax bracket now beats a guess about retirement.

Two rules govern access. A Roth IRA has income limits based on your modified adjusted gross income. A spousal IRA lets a non-working spouse save using the working spouse's income, up to the same limit.

A backdoor Roth is a workaround when your income blocks a direct one. You put after-tax money in a traditional IRA, then convert it to a Roth. Conversion is a taxable event on any pre-tax growth, but it does not trigger the 10 percent early withdrawal penalty.

One more rule helps older savers. Since 2020 you can keep contributing to a traditional IRA past age 70 and a half, with no age limit on earned contributions. The old cutoff is gone, so saving can continue as long as you work and have taxable compensation.

What are the withdrawal rules for an IRA?

RMDs, required minimum distributions, force you to start withdrawing from a traditional IRA at age 73. Miss them and you owe a penalty, so most people take the minimum. Roth accounts skip RMDs for the original owner.

Before 59 and a half, the 10% early withdrawal penalty has real exceptions. A first home purchase up to $10,000, a birth or adoption, and qualified higher education expenses all let you out early. The list is narrow and set by the IRS, so it pays to know it.

A Roth IRA adds its own clock. Earnings come out tax-free only after five tax years pass since your first contribution, even past 59 and a half. Pull earnings before that and you may owe tax and penalty.

Your Roth contributions, the money you put in, are never locked up the same way. You can withdraw them at any time with no tax or penalty. The five-year rule applies only to the earnings on top.

Can you deduct contributions and roll over an IRA?

Whether a traditional IRA contribution is deductible depends on your income and whether a workplace plan covers you. Covered by a plan at work? The deduction phases out at higher income levels. If no plan covers you or your spouse, the deduction applies across a wider band.

Contribute past the annual limit and the excess stays in the account. You owe a 6 percent excise tax each year it sits there. Remove the excess and its earnings before the tax filing deadline, and you can erase the penalty.

You can move money between IRAs, or bring an old 401(k) in, without a taxable event. A direct transfer between providers, custodian to custodian, is the clean path. If the plan cuts you a check instead, you have 60 days to redeposit, and it withholds 20 percent up front.

What are SEP and SIMPLE IRAs?

Those two cover most people, but not everyone. A SEP IRA lets a self-employed person or small business put retirement money into traditional IRA accounts in each worker's name, with much higher annual limits than a standard IRA.

A SIMPLE IRA serves a small business with no other retirement plan. Employer and employee both contribute, like a 401(k) but cheaper to run and with lower limits. Self-employed, you save more with a SEP or SIMPLE. On a salary, a traditional or Roth is the simpler fit.