Individual Retirement Accounts (IRAs): A Guide

An individual retirement account (IRA) offers tax-advantaged retirement savings. You can choose from a traditional, Roth, SEP or SIMPLE IRA.

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What is an IRA?

An individual retirement account

is a tax-deferred investment account that helps you save for retirement. You can open an IRA at banks, robo-advisors and brokers, and your contributions may be tax-deductible, or withdrawals may be tax-free.

The IRS officially calls these accounts individual retirement arrangements.

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How does an IRA work?

Investing in an IRA allows your money to grow and compound, says certified financial planner Matt Aaron, founder of Washington, D.C.-based Lux Wealth Planning, an affiliate of Northwestern Mutual. You can invest in stocks, bonds and 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.)

IRAs have annual contribution limits. Generally, you (or your spouse) must have earned income to contribute to an IRA. 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

.

» Are you on track for retirement? Find out with our retirement calculator.

What are the types of IRAs?

There are five popular types of IRAs. Here's an overview:

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. The contribution limit for traditional IRAs in 2022 is $6,000 per year. People 50 and older can contribute up to $7,000 per year

.

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.

Traditional IRA deduction limits in 2022

How much of your traditional IRA contributions can you deduct from your taxes? These income limits apply only if you (or your spouse) have a retirement plan at work.

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 age 72.

Filing status

2022 MAGI

Deduction limit

Single or head of household (and covered by retirement plan at work)

$68,000 or less

Full deduction

More than $68,000 but less than $78,000

Partial deduction

$78,000 or more

No deduction

Married filing jointly (and covered by retirement plan at work)

$109,000 or less

Full deduction

More than $109,000 but less than $129,000

Partial deduction

$129,000 or more

No deduction

Married filing jointly (spouse covered by retirement plan at work)

$204,000 or less

Full deduction

More than $204,000 but less than $214,000

Partial deduction

$214,000 or more

No deduction

Married filing separately (you or spouse covered by retirement plan at work)

Less than $10,000

Partial deduction

$10,000 or more

No deduction

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, Aaron says.

“The question is, do you want to pay your taxes now or later? For me, I’d rather pay taxes now,” he says.

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.”

In 2022, the annual Roth IRA contribution limit is $6,000 ($7,000 if 50 or older) for modified adjusted gross incomes below $144,000 for single filers and head of household, or $214,000 for married people filing jointly.

There are Roth IRA income limits, so the amount you can contribute phases out depending on how much you earn. Keep in mind that the contribution limit for Roth and traditional IRAs is a combined limit; if you have both types of IRA, you can contribute only the maximum between them.

Filing status

2022 Income range

Maximum annual contribution

Single, head of household or married filing separately (if you didn't live with spouse during year)

Less than $129,000

$6,000 ($7,000 if 50 or older)

$129,000 up to $144,000

Contribution is reduced

$144,000 or more

No contribution allowed

Married filing jointly or qualifying widow(er)

Less than $204,000

$6,000 ($7,000 if 50 or older)

$204,000 up to $214,000

Contribution is reduced

$214,000 or more

No contribution allowed

Married filing separately (if you lived with spouse at any time during year)

Less than $10,000

Contribution is reduced

$10,000 or more

No contribution allowed

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 2022, contributions are limited to 25% of compensation or $61,000, whichever is less. There's no catch-up contribution at age 50+ for SEP IRAs, and SEP IRAs require minimum distributions beginning at age 72. SEP IRAs require proportional contributions for each eligible employee if business owners contribute for themselves.

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 2022 are $14,000 per year for those under age 50. People age 50 and older can make an additional $3,000 catch-up contribution. Employer contributions are mandatory.

Rollover IRA

A rollover IRA is an IRA you open when you transfer eligible assets from an employer sponsored plan, such as a 401(k), into an IRA.

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The benefits of an IRA

A 401(k) or pension may not provide enough retirement income. Putting the maximum contribution amount in an IRA can help you prepare for retirement, save on taxes, and access investment options your workplace retirement plan might not offer.

The benefits of an IRA and Roth IRA

Is it better to have a 401(k) or IRA?

You can have 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.

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.

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.

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.

Frequently asked questions

You can have 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.

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.

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.

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 start only when you start contributing money to the account. But don’t worry: You don’t need to come up with your full contribution all at once. You’re also not required to save the maximum the IRS allows (up to $6,000 in 2022, or $7,000 if you’re age 50 or over).

You can add money to your IRA at whatever cadence and amount work for your budget. Many brokers and robos allow savers to set up automatic deposits to transfer money from your bank into your account.

Yes. You can put your IRA money in a variety of investments, and some of those investments may lose value.

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