What is IRA?
An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help individuals save for retirement independently of employer-sponsored plans. You contribute your own money, choose your investments from a range of assets like stocks, bonds and mutual funds, and receive tax benefits either when you contribute (traditional IRA) or when you withdraw in retirement (Roth IRA).
How does an IRA actually work?
You open an IRA with a financial institution—a bank, brokerage or robo-advisor—then deposit money up to annual limits set by the IRS. For 2024, the contribution limit is $7,000 if you're under 50, or $8,000 if you're 50 or older.
What's the difference between a traditional IRA and a Roth IRA?
A traditional IRA gives you a tax deduction in the year you contribute, lowering your taxable income now, but you pay ordinary income tax on every dollar you withdraw in retirement. A Roth IRA requires you to contribute after-tax dollars—no upfront deduction—but all withdrawals in retirement are completely tax-free if you're 59½ or older and have held the account for at least five years.
Who should open an IRA and when?
Anyone with earned income can open an IRA, whether you have a 401(k) at work or not. If your employer doesn't offer a retirement plan, an IRA is often your primary retirement savings vehicle.
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Can you have multiple IRAs or combine an IRA with a 401(k)?
You can open as many IRAs as you want—multiple traditional IRAs, multiple Roth IRAs, or a mix of both—but your total contributions across all IRAs cannot exceed the annual limit ($7,000 or $8,000 for 2024). Having both an IRA and a 401(k) is common and beneficial: you contribute to your 401(k) up to the employer match, then fund an IRA to diversify tax treatment and investment options.
What happens if you withdraw from an IRA early?
Withdrawals before age 59½ typically trigger a 10% penalty on top of ordinary income tax (for traditional IRAs) or on earnings only (for Roth IRAs, since contributions can be withdrawn anytime tax- and penalty-free). Exceptions exist: you can avoid the penalty for first-time home purchases up to $10,000, qualified higher education expenses, certain medical expenses exceeding 7.5% of adjusted gross income, or if you become permanently disabled.
How is an IRA different from a brokerage account?
A regular taxable brokerage account has no contribution limits and no age restrictions on withdrawals, but you pay capital gains tax on profits each year you sell investments and dividend tax annually. An IRA caps annual contributions and restricts access until retirement, but shelters growth from annual taxes—either deferring tax until withdrawal (traditional) or eliminating it entirely (Roth).
FAQ
Can I contribute to an IRA if I have no job?
You need earned income to contribute, but a spousal IRA allows a working spouse to contribute up to the annual limit on behalf of a non-working spouse, provided you file a joint tax return and the working spouse has enough earned income to cover both contributions.
What investments are not allowed in an IRA?
IRAs cannot hold life insurance contracts or collectibles such as art, antiques, gems, stamps, alcoholic beverages or most coins (American Eagle and certain other government-issued bullion coins are exceptions). The IRS also prohibits self-dealing transactions.
Do I have to take money out of my IRA at a certain age?
Traditional IRAs require you to begin required minimum distributions (RMDs) starting at age 73 (as of 2023, under the SECURE 2.0 Act). Roth IRAs have no RMDs during the original owner's lifetime, which makes them useful for estate planning.
Can I move money from a 401(k) into an IRA?
Yes, this is called a rollover. When you leave a job, you can roll your 401(k) balance into a traditional IRA (or a Roth IRA if you pay tax on pre-tax contributions).
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Model long-term contributions with the Roth IRA calculator
A Roth IRA account is funded with after-tax money, so contributions do not generally create a federal income-tax deduction. Qualified distributions can receive favorable federal tax treatment when applicable requirements are met. A projection adds planned contributions to the current balance and applies an assumed return. Market performance, fees, contribution timing, and withdrawals can make actual results materially different from the estimate.
Roth IRA contribution limits and income eligibility rules can change, so check current IRS guidance rather than relying on an older limit. When comparing a traditional IRA vs Roth IRA, consider current tax treatment, possible deductions, future distribution rules, and required minimum distribution rules. A Roth IRA vs 401k comparison should also address employer matching, investment choices, fees, creditor protections, and access to money. Complex conversion strategies may create tax consequences.
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