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. It is a type of account you open at a bank, credit union, or investment firm where you can save money specifically for retirement. The main reason to use one instead of a regular savings account is that the government gives you tax breaks — you either don't pay income tax on the money you put in, or you don't pay income tax on the money you take out later, depending on which type of IRA you choose.

Think of it this way: if you put $5,000 into a regular savings account and earn $100 in interest, you owe income tax on that $100. If you put $5,000 into an IRA and earn $100, you may owe no tax on that $100 at all — or you may have already gotten a tax break when you deposited the money. That tax advantage is the whole point. The government created IRAs to encourage people to save for retirement instead of spending everything they earn.

An IRA is not an investment itself. It is a container. Inside that container, you can hold cash, stocks, bonds, mutual funds, or other investments. You decide what to buy and sell within the account, or you can let a professional manage it for you.

Key Takeaways

  • An IRA is a retirement savings account that offers tax advantages — either a deduction when you deposit money or tax-free withdrawals later, depending on the type.
  • There are two main types: a Traditional IRA (where you may deduct contributions now and pay tax when you withdraw) and a Roth IRA (where you pay tax now and withdraw tax-free later).
  • You can open an IRA at a bank, credit union, or investment firm, and you control what investments go inside it.
  • There are annual limits on how much you can deposit — the amount changes each year and depends on your age.
  • You generally cannot withdraw money before age 59½ without paying a penalty, which is why it is called a retirement account.

Traditional IRA vs. Roth IRA: The two main types

The two most common IRAs are the Traditional IRA and the Roth IRA. They work in opposite directions with taxes.

With a Traditional IRA, you deposit money and may be able to deduct that amount from your income taxes in the year you deposit it. That means if you earn $50,000 and deposit $5,000 into a Traditional IRA, you might only owe taxes on $45,000. The money grows inside the account without being taxed each year. When you withdraw money after age 59½, you pay income tax on whatever you take out. This works well if you expect to be in a lower tax bracket in retirement than you are now.

With a Roth IRA, you deposit money that you have already paid income tax on — you get no deduction now. The money grows inside the account without being taxed each year. When you withdraw money after age 59½, you pay no income tax on it at all. This works well if you expect to be in a higher tax bracket in retirement, or if you straightforward want the certainty of knowing your withdrawals will be tax-free.

Which one makes sense depends on your current income, your expected retirement income, and how long you plan to let the money sit. Many people benefit from having both types, but the rules about income limits and contribution limits are different for each, so it is worth understanding both before you choose.

How much you can deposit each year

The government sets an annual limit on how much you can deposit into an IRA. This limit changes most years. For 2024, the limit is $7,000 per year if you are under age 50, and $8,000 per year if you are 50 or older (the extra $1,000 is called a catch-up contribution). The limit for 2025 may be different — the IRS adjusts it based on inflation.

This limit applies to the total of all your IRAs combined. If you have both a Traditional IRA and a Roth IRA, the $7,000 limit covers deposits to both accounts together, not $7,000 to each one.

You can deposit less than the limit, or nothing at all in a given year. You cannot carry forward unused room from one year to the next — if you do not deposit the full amount this year, you lose that year's opportunity. You also cannot deposit more than you earned in income that year. If you earned $4,000 in 2024, you can deposit at most $4,000 to an IRA, even though the limit is $7,000.

When you can withdraw money without a penalty

IRAs are designed to lock your money away until retirement. If you withdraw money before age 59½, you generally have to pay a penalty — an extra tax on top of the regular income tax you owe. The penalty is usually 10 percent of the amount you withdraw.

There are a few exceptions. With a Traditional IRA, you can withdraw money early without penalty if you use it for a first home purchase (up to $10,000 lifetime), higher education expenses, medical bills, or a few other specific hardships. With a Roth IRA, the rules are more flexible — you can always withdraw the money you deposited (not the earnings) without penalty, at any age, for any reason.

At age 59½, you can withdraw as much as you want, whenever you want, without penalty. You will still owe income tax on Traditional IRA withdrawals, but there is no extra penalty. At age 73, the government requires you to start taking withdrawals from a Traditional IRA — this is called a Required Minimum Distribution or RMD. Roth IRAs do not have this requirement during your lifetime.

Where to open an IRA

You can open an IRA at most banks, credit unions, and investment firms. Common places include Fidelity, Vanguard, Charles Schwab, your local bank, and many online banks. Each institution offers slightly different investment options and fee structures, so it is worth comparing a few before you choose.

When you open an account, you will need to decide whether you want a Traditional or Roth IRA. You will also decide what to invest the money in — whether that is a savings account within the IRA (which earns very little interest), stocks, bonds, mutual funds, or a mix. If you are not sure what to invest in, many institutions offer target-date funds, which automatically adjust from riskier investments to safer ones as you approach retirement.

Opening an IRA is straightforward. You will need to provide your Social Security number, proof of identity, and proof of address. The whole process usually takes 15 to 30 minutes online or in person.

How an IRA differs from a 401(k)

If your employer offers a retirement plan, it is usually a 401(k), not an IRA. A 401(k) is an employer-sponsored plan, meaning your employer sets it up and often contributes money to it on your behalf. An IRA is something you open and manage on your own.

The annual contribution limits are much higher for a 401(k) — in 2024, you can deposit up to $23,500 per year, compared to $7,000 for an IRA. However, you can have both. Many people contribute to their employer's 401(k) first (especially if the employer matches contributions), then open an IRA with additional savings.

If you leave a job, you can roll over the money from your employer's 401(k) into an IRA. This is a common way people end up with IRAs — they accumulate money from several different jobs over time.

What happens to an IRA when you die

When you open an IRA, you name a beneficiary — a person or organization that will inherit the account if you die. This is usually a spouse, adult child, or other family member. The beneficiary can then withdraw the money, and the tax rules depend on who they are and what type of IRA it is.

If your spouse inherits a Traditional IRA, they can treat it as their own IRA and follow the normal withdrawal rules. If an adult child inherits it, they must withdraw all the money within 10 years, though the rules about how much to withdraw each year are complex. If you name a charity as beneficiary, the charity receives the money tax-free.

You can change your beneficiary at any time by contacting the institution where your IRA is held. It is a good idea to review your beneficiary designation every few years, especially after major life changes like marriage, divorce, or the birth of children.

Frequently Asked Questions

Can I have more than one IRA?

Yes, you can have multiple IRAs at different institutions. However, the annual contribution limit applies to all of them combined. If you have a Traditional IRA and a Roth IRA, you can deposit a total of $7,000 across both accounts in 2024, not $7,000 to each one.

What if I earn too much money to contribute to a Roth IRA?

Roth IRAs have income limits — if you earn above a certain amount, you cannot deposit to one. The limit depends on your filing status and changes each year. A Traditional IRA has no income limit for contributions, though the tax deduction phases out at higher incomes if you have an employer retirement plan.

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

With a Traditional IRA, you can withdraw up to $10,000 lifetime for a first home purchase without the 10 percent early withdrawal penalty, though you still owe income tax on the withdrawal. With a Roth IRA, you can withdraw the money you deposited (not earnings) at any time without penalty, and if you have had the account for at least five years, you can also withdraw earnings penalty-free for a first home.

What is the difference between an IRA and a savings account?

A savings account is a regular bank account where you earn interest. An IRA is a retirement account with tax advantages — you either deduct contributions or withdraw tax-free later. IRAs also have rules about when you can withdraw money without penalty. A savings account has no such restrictions.

Do I need to report my IRA on my taxes?

If you make a deductible contribution to a Traditional IRA, you report it on your tax return to claim the deduction. If you withdraw money from an IRA, the institution sends you a form showing the withdrawal, and you report it on your return. A Roth IRA contribution is not deductible, so you do not report it, but withdrawals are still tracked by the institution.