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What is an IRA?
IRA stands for individual retirement account, which is a tax-deferred investment account that helps you save for retirement. Depending on which type of IRA you choose, your contributions may be tax-deductible or withdrawals may be tax-free. The IRS refers to these accounts as individual retirement arrangements.
How does an IRA work?
You take pre-tax or after-tax dollars and deposit them into an IRA account. You can then invest that money in stocks, bonds, exchange-traded funds or other assets.
How your account balance grows over time depends on how you invest, and how much you contribute to the IRA. (See how to invest your IRA for simple investment strategies.) There are several types of IRAs, including the traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA.
Generally, you (or your spouse) must have earned income to contribute to an IRA, and the accounts have annual contribution limits. There are also withdrawal rules: You may face a 10% penalty and a tax bill if you withdraw money before age 59 1/2, unless you qualify for an exception.
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Benefits of an IRA
The main benefit of an IRA is that the money you invest in one grows either tax-free or tax-deferred, depending on the type of IRA you choose.
If you contribute to a traditional IRA, you'll get a tax deduction on your contributions in the year they are made; you'll then pay taxes when you take distributions in retirement.
If you contribute to a Roth IRA, there is no immediate tax deduction or benefit, but distributions in retirement are tax-free.
But the tax benefit isn't the only perk. An IRA might give you access to investment options your workplace retirement plan doesn't offer, as well as another way to save – a 401(k) or pension alone may not provide enough retirement income.
» Are you on track for retirement? Find out with our retirement calculator.
5 types of IRAs
Here are five popular types of IRAs and an overview of each:
1. Traditional IRA
Contributions to traditional IRAs are often tax-deductible. For example, contributing $3,000 to a traditional IRA could reduce the amount of your taxable income by $3,000. However, withdrawals from traditional IRAs in retirement are taxable as ordinary income.
If you're married and you or your spouse has a retirement plan at work, the amount of your traditional IRA contribution that you can deduct is reduced, and eventually eliminated altogether, once you hit a certain income. You can still make contributions, but they won’t be tax-deductible. If you and your spouse don't have retirement plans at work, then you can deduct your IRA contribution no matter how much your income.
2. Roth IRA
Contributions to Roth IRAs are not tax-deductible, but withdrawals from Roth IRAs are tax-free and there are no taxes on investment gains. It's an attractive option for investors who have a long time before they retire, says certified financial planner Matt Aaron, founder of Washington, D.C.-based Lux Wealth Planning, an affiliate of Northwestern Mutual.
“The question is, do you want to pay your taxes now or later? For me, I’d rather pay taxes now,” says Aaron.
Roth IRAs can help you combat inflation, Aaron says, because money loses value over time. He says he thinks of a Roth IRA as paying taxes on the seed vs. paying taxes on the harvest.
"I don't have the magic ball and I can never say I know what’s going to happen in the future, but if taxes go up, and you’re taking that money out in the future, you get to potentially minimize the taxes you pay.”
3. SEP IRA
Generally, SEP IRAs are IRAs for self-employed people or small-business owners with few or no employees. Similar to traditional IRAs, the contributions are tax-deductible. Investments grow tax-deferred until retirement when distributions are taxed as income.
In 2023, contributions are limited to 25% of compensation or $66,000, whichever is less. There's no catch-up contribution at age 50+ for SEP IRAs. SEP IRAs require proportional contributions for each eligible employee if business owners contribute for themselves.
» MORE: Learn more about SEP IRAs and how to open one
4. SIMPLE IRA
SIMPLE IRAs (Savings Incentive Match Plan for Employees Individual Retirement Accounts) are for small businesses with fewer than 100 employees. Similar to traditional IRAs, the contributions are tax-deductible. Investments grow tax-deferred until retirement, when distributions are taxed as income. Employee contribution limits for a SIMPLE IRA in 2023 are $15,000 per year for those under age 50. People age 50 and older can make an additional $3,500 catch-up contribution in 2023. Employer contributions are mandatory.
» MORE: Learn more about SIMPLE IRAs and how to open one
5. Rollover IRA
A rollover IRA is a type of IRA account that allows you to transfer eligible assets from an employer sponsored plan, such as a 401(k), into an IRA. People tend to do this when they're switching jobs so they can house all of their money in one place.
» MORE: Learn more about rollover IRAs
IRA contribution limits in 2022 and 2023
Both traditional and Roth IRAs have the same contribution limits – $6,000 in 2022 and $6,500 in 2023, plus an additional $1,000 if you are 50 or older. That is a combined limit; if you have both types of IRA, you can contribute only the maximum between them.
Traditional IRA deduction limits
How much of your traditional IRA contributions can you deduct from your taxes? It depends on how much you earn. There are income limits on traditional IRA deduction, but they only apply only if you (or your spouse) have a retirement plan at work.
Filing status | 2022 or 2023 income range | Deduction limit |
|---|---|---|
Single or head of household (and covered by retirement plan at work) | 2022: $68,000 or less. 2023: $73,000 or less. | Full deduction. |
2022: More than $68,000, but less than $78,000. 2023: More than $73,000, but less than $83,000. | Partial deduction. | |
2022: $78,000 or more. 2023: $83,000 or more. | No deduction. | |
Married filing jointly (and covered by retirement plan at work) | 2022: $109,000 or less. 2023: $116,000 or less. | Full deduction. |
2022: More than $109,000, but less than $129,000. 2023: More than $116,000, but less than $136,000. | Partial deduction. | |
2022: $129,000 or more. 2023: $136,000 or more. | No deduction. | |
Married filing jointly (spouse covered by retirement plan at work) | 2022: $204,000 or less. 2023: $218,000 or less. | Full deduction. |
2022: More than $204,000, but less than $214,000. 2023: More than $218,000, but less than $228,000. | Partial deduction. | |
2022: $214,000 or more. 2023: $228,000 or more. | No deduction. | |
Married filing separately (you or spouse covered by retirement plan at work) | 2022 and 2023: Less than $10,000. | Partial deduction. |
2022 and 2023: $10,000 or more. | No deduction. |
Generally, you can take distributions from a traditional IRA starting at age 59 1/2. If you take money out before then, you may have to pay a 10% penalty (there are some exceptions). You must start taking required minimum distributions when you reach a certain age —in 2023, that age is 73.
» MORE: Learn more about traditional IRAs
Roth IRA contribution limits
There are Roth IRA income limits, so the amount you can contribute phases out and is eventually eliminated completely at certain incomes.
Filing status | 2022 or 2023 Income range | Maximum annual contribution |
|---|---|---|
Single, head of household, or married, filing separately (if you didn't live with spouse during year) | 2022: Less than $129,000. 2023: Less than $138,000. | 2022: $6,000 ($7,000 if 50 or older). 2023: $6,500 ($7,500 if 50 or older). |
2022: More than $129,000, but less than $144,000. 2023: More than $138,000, but less than $153,000. | Contribution is reduced. | |
2022: $144,000 or more. 2023: $153,000 or more. | No contribution allowed. | |
Married filing jointly or qualifying widow(er) | 2022: Less than $204,000. 2023: Less than $218,000. | 2022: $6,000 ($7,000 if 50 or older). 2023: $6,500 ($7,500 if 50 or older). |
2022: More than $204,000, but less than $214,000. 2023: More than $218,000, but less than $228,000. | Contribution is reduced. | |
2022: $214,000 or more. 2023: $228,000 or more. | No contribution allowed. | |
Married filing separately (if you lived with spouse at any time during year) | 2022 and 2023: Less than $10,000. | Contribution is reduced. |
2022 and 2023: $10,000 or more. | No contribution allowed. |
If you earn too much to contribute to a Roth IRA, you can try the backdoor Roth method instead.
How to open an IRA
Two popular ways to get an IRA are through brokers and robo-advisors.
Brokers: If you want to choose investments for yourself, an online broker can be a good way to go. Review our best IRA accounts to compare.
Robo-advisors: If you want help managing your retirement account, consider a robo-advisor — a service that selects low-cost and risk-appropriate investments for you. See our list of best robo-advisors for help choosing the right one for you.
See our guide to opening an IRA for more information on moving money into your account.
» MORE: Learn more about Roth IRAs and how to open one
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Frequently asked questions
Is it better to have a 401(k) or IRA?
If you don't get an employer match, if you plan to max out your 401(k), or if your 401(k) has narrow investment options or high fees, it might be a good idea to invest primarily in an IRA.
That said, you can have both a 401(k) and an IRA. You can get the full employer match on your 401(k), and open an IRA to boost your retirement savings.
The big difference between an IRA and a 401(k) is that employers offer 401(k)s, while you would open an IRA yourself through a broker or bank. IRAs typically offer more investment options; 401(k)s allow higher annual contributions.
If you have an old 401(k), you can also move that money into a rollover IRA. A benefit of a rollover IRA is that when done correctly, the money keeps its tax-deferred status and doesn't trigger taxes or early withdrawal penalties.
» MORE: IRA vs. 401(k): How to choose
How much money do you need to start an IRA?
Many discount brokers and robo-advisors have $0 minimums to open an IRA. You can see which ones in our roundup of best IRA providers. However, the tax perks of investing in an IRA begin only once you've start contributing money to the account. The maximum the IRS allows you to contribute is up to $6,000 in 2022, or $6,500 in 2023. You can contribute an extra $1,000 per year, both years, if you’re age 50 or over. You can contribute the full amount, but it is not required.
You can add money to your IRA at whatever cadence and amount work for your budget. Many brokers and robo-advisors allow investors to set up automatic deposits to transfer money from a bank into an account.
Can you lose money in an IRA?
Yes. You can put your IRA money in a variety of investments, and some of those investments may lose value.