What is an IRA?
An Individual Retirement Account (IRA) is an investment account designed for building retirement savings. There are several types — traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs and more — and all offer tax benefits that reward you for saving. Generally, you (or your spouse) need to have earned income to contribute to an IRA.
How an IRA works
Two of the most popular types of accounts — the traditional IRA and the Roth IRA — allow you to save $6,000 per year ($7,000 if you’re 50 or older), even if you’re also contributing to a 401(k) or other workplace savings plan. (Those limits are up from $5,500 and $6,500 in 2018.)
With a traditional IRA, contributions are tax-deductible up to IRS limits, and you won’t owe income taxes until you withdraw the funds. With a Roth, contributions are not tax-deductible, but your investments grow tax-free and you can withdraw money tax-free in retirement from a Roth.
Most banks and brokers offer traditional and Roth accounts, but the types of investments you’ll have access to will vary depending on the provider. With a bank, you’ll likely find certificates of deposit. With a broker, you’ll be able to invest in stocks and bonds. For a long-term goal like retirement, we generally recommend stocks and bonds because of their higher returns. (See how to invest your IRA for simple investment tips.)
There are other types of IRAs, too, with a variety of benefits in different situations, including spousal IRAs, self-directed IRAs, SEP IRAs, SIMPLE IRAs, backdoor Roths and inherited IRAs. See more about each of these below.
» Ready to get started? These are our top picks for the best IRA accounts
With a traditional IRA, generally you can deduct the amount of your contributions on your tax return, and your money grows tax-deferred — that is, you won’t owe income taxes until you withdraw the money from your account.
Anyone — regardless of income — can contribute to a traditional account. But the amount of your contribution that you’re allowed to deduct from your taxes may be limited by your income if you or your spouse has access to a retirement plan at work.
If you (or your spouse) has a retirement plan at work, then check out the deduction limits:
If you’re eager to get an upfront tax break today, a traditional IRA may be a good choice. Or, if you expect to pay a lower tax rate in retirement, then delaying the tax bill until then makes sense.
Keep in mind that to avoid a withdrawal penalty when taking money out of a traditional IRA, you'll need to be age 59 ½ or meet some specific requirements — see traditional IRA withdrawals for details.
If you’ve got the willpower to wait to get your tax break, the Roth can be an especially attractive option.
With a Roth, contributions are not tax-deductible, but your money grows tax-free — you never owe taxes on the investment gains in your account — and you can withdraw money tax-free in retirement.
While you can’t deduct Roth contributions from your taxable income while you’re saving, in retirement your Roth withdrawals are not taxed at all. That goes for contributions and investment earnings. (With a traditional IRA, you pay taxes on both your contributions and earnings when you withdraw money.)
The Roth comes with another big perk: You can take out money you contributed to a Roth IRA at any time without penalty. But there are rules about early withdrawals of investment earnings and other transferred funds — see Roth IRA withdrawals for details.
There are income limits that prevent higher earners from contributing to Roths. (However, in that situation, a backdoor Roth IRA is another option — more on that below.) Here are the latest Roth contribution limits:
Other types of IRA accounts
While traditional and Roth IRAs are the primary varieties, there are other types of accounts that might be a better fit for your situation.
Opening your IRA account
Before choosing a provider, ask yourself how involved you want to be in the management of your investments:
If you want to choose investments for yourself, an online brokerage is a good way to go. Review our best IRA accounts to compare.
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.
Once you have chosen a provider, the online signup process is pretty simple: You'll be asked to provide some general information, including Social Security number, birthdate, contact information and employment details. See our guide to opening an IRA for more information on moving money into your account.