An IRA is an investment account designed to help you save for retirement, and you can use your account to invest in a range of assets.
IRAs come in a variety of types, with the traditional IRA and Roth IRA being the two most popular. Other IRA types include savings incentive match plan for employees (SIMPLE) IRAs and simplified employee pension (SEP) IRAs.
Each account is bound by a unique set of rules, like how much you’re allowed to contribute annually and how account deposits and distributions are taxed.
IRAs are a common investment account and can be found at most banks, credit unions and online brokers. Financial institutions that hold your IRA’s investments are known as IRA custodians. While the law permits any investment inside an IRA except life insurance and collectibles, it’s ultimately up to the IRA custodian as to what assets they offer their customers.(1) Common investment options include stocks, bonds, exchange-traded funds (ETFs) and mutual funds. Some IRA custodians will also let you invest in alternative assets such as cryptocurrency and real estate.
The Internal Revenue Service (IRS) determines how much money you can deposit each year and when you can withdraw that money. In general, withdrawing IRA money before the age of 59.5 will trigger a 10% early-withdrawal penalty in addition to regular taxes on the distribution.
IRAs offer tax-advantages depending on the type of account you open. For instance, contributions to a traditional IRA are tax-deductible, while qualified distributions from a Roth IRA are tax-free.
The IRA contribution limit for 2024 increased to $7,000 ($8,000 if you’re age 50 or older). This is the amount you can contribute to all your traditional and Roth IRAs in total. Roth IRA income limits may reduce your allowable contribution amounts to a Roth IRA.
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Individual retirement accounts come in four main types. Learn more about each IRA type to understand which account can serve you best.
Contributions made to traditional IRAs are typically tax-deductible. This means if you deposit $1,000 into your traditional IRA, your taxable income for the year drops by $1,000. The downside? All withdrawals made from a traditional IRA are subject to tax. And if you make a withdrawal from your traditional IRA before the age of 59.5, you’ll pay a 10% withdrawal penalty. Annual contribution limits for traditional IRAs in 2024 are $7,000 per account — but if you’re over 50, you can contribute up to $8,000 through catch-up contributions.
Unlike traditional IRAs, Roth IRA contributions are not tax deductible — anything you deposit into your Roth IRA will still count toward your annual income once tax season rolls around. But Roth IRAs offer a different type of tax advantage: Withdrawals are tax-free and you don’t pay tax on capital gains. Plus, withdrawal Roth IRA contributions at any time without taxes or penalties. The same contribution limits that govern traditional IRAs also apply to Roth IRAs: $7,000 per account unless you’re over 50, in which case you can contribute up to $8,000.
SIMPLE IRAs are employer-sponsored retirement accounts, and they’re typically offered by small businesses with 100 or fewer employees. SIMPLE IRAs follow the same contribution and distribution rules as traditional IRAs. Contributions are tax-deductible and your money is taxed in when you begin taking withdrawals.
Employer contributions are mandatory, which means your employer must match what you contribute to your account up to 3% of your pay. Contribution limits apply to SIMPLE IRAs, but are higher than the caps on traditional and Roth IRAs. In 2024, annual contribution limits for SIMPLE IRAs are $16,000 per account — but if you’re over the age of 50, you can contribute as much as $19,500 through catch-up contributions.
A SEP IRA is a retirement account for self-employed individuals. They also work like traditional IRAs: tax-deferred gains and tax-deductible contributions. The difference lies in the contribution limits. In 2024, contribution limits for SEP IRAs sit at $69,000 or 25% of compensation — whichever is less.
To set up a SEP IRA, you must be a sole proprietor or belong to a partnership or corporation.
To sum up, here’s an overview of the differences that separate traditional, Roth, SIMPLE and SEP IRAs.
| Traditional IRA | Roth IRA | SIMPLE IRA | SEP IRA | |
|---|---|---|---|---|
| Best for | Individuals | Individuals | Small businesses with 100 or fewer employees | Businesses of any size, including freelancers and self-employed individuals |
| Contribution limits | $7,000 per account ($8,000 if you’re over 50) | $7,000 per account ($8,000 if you’re over 50) | $16,000 per account ($19,500 if you’re over 50) | The lesser of $69,000 or 25% of compensation |
| Tax-advantage | Tax-deductible contributions | Tax-free distributions | Tax-deductible contributions | Tax-deductible contributions |
Ready to open an IRA? Here’s a quick look at the process:
Fees can eat into profits and detract from your retirement nest egg. Before you open an IRA, be prepared to encounter one or more of the following fees:
Both 401(k)s and IRAs are tax-advantaged investment accounts designed to help you save for retirement. The main difference? Employers offer 401(k)s, while individuals open traditional and Roth IRAs.
These two accounts also differ in terms of investment options and contribution limits. Most 401(k)s are limited to mutual funds, while IRAs allow everything from stocks to ETFs to real estate. 401(k)s also have a higher annual contribution limit, and many employers offer matching contributions.
Consider these pros and cons before opening an IRA:
Yes, there are a handful of circumstances in which you can withdraw funds from your traditional IRA ahead of schedule and avoid the 10% withdrawal penalty, including:
| Response | % of Americans |
|---|---|
| I do not have this, but plan on getting it in the next 6 months | 13% |
| I do not have this nor plan on getting it | 56% |
| I currently have this | 31% |
While 401Ks are the most popular savings option for American adults (44%) about a third (31%) have an IRA.
Each type of IRA offers a distinct path to tax-advantaged wealth building. Before you open an IRA, review your retirement investment options with multiple brokers to find the account that’s best equipped to serve your ongoing investment needs.
As many as you’d like. In fact, there’s no limit to the number of IRAs you can hold. But doubling down on your IRA count doesn’t necessarily mean you can increase your contributions. Your annual contribution limit will remain the same no matter how many accounts you hold.
Yes. An IRA is an investment account and any investment you make in that account is subject to risk of loss.
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