What Is an IRA (Individual Retirement Account)?

An Individual Retirement Account (IRA) is a tax-advantaged savings account that individuals can use to save for retirement. Unlike 401(k)s, IRAs are not tied to your employer. There are two common types: Traditional IRAs (pre-tax contributions, taxed at withdrawal) and Roth IRAs (post-tax contributions, tax-free withdrawals).

Key Points

• Eligibility: Anyone with earned income can open an IRA, but deduction and contribution limits may vary based on income and filing status.
• Tax treatment: Traditional IRAs may offer a tax deduction now, while Roth IRAs offer tax-free withdrawals later.
• Contribution limits: For 2025, the limit is $7,000 annually, or $8,000 if you’re 50 or older.
• Withdrawals: Traditional IRAs require required minimum distributions (RMDs) starting at age 73. Roth IRAs do not require RMDs during the owner’s lifetime.
• Investment choices: IRAs typically offer a wide range of investment options including stocks, bonds, and mutual funds.

FAQ

• Can I have both a 401(k) and an IRA? Yes, but income limits may affect deductibility for a Traditional IRA.
• Is there a penalty for early withdrawal? Yes, early withdrawals before age 59½ may incur a 10% penalty unless an exception applies.
• What’s better: Traditional or Roth IRA? It depends on whether you prefer a tax break now or tax-free income in retirement.