What Are Individual Retirement Accounts (IRAs)?

An individual retirement account, commonly known as an IRA, is a simple, tax-advantaged way to save money for retirement. There are a range of different IRA account options and strategies to choose from. Our guide aims to give you a comprehensive look at them all.

What Is an IRA?

An IRA is a retirement savings account that provides you with tax-free investment growth and a range of other tax advantages. Anyone who earns income—and even certain people who don’t—can contribute money to an IRA.

IRAs are invaluable tools for planning a financially secure retirement by allowing your money to grow tax-free. This special treatment provides extra compound growth beyond what you’d see in a taxable investment account.

Consider this scenario: If you invested $5,000 a year for 40 years in an IRA with a 7% average annual return, you’d end up with just over $1 million by the time you hit retirement.

If you made the same investment in a taxable brokerage account, you’d have just under half that amount, given the impact of income taxes and capital gains taxes from the trades required to manage your portfolio over four decades. That’s why saving in a tax-advantaged account can help supercharge your retirement savings.

IRAs also come with other tax benefits, too, depending on whether you opt to save in a traditional IRA or a Roth IRA.

Roth IRA vs. Traditional IRA

All IRAs can be considered one of two things: traditional or Roth accounts, each of which comes with its own rules and tax benefits.

With a traditional IRA, you’re generally able to deduct some or all of your annual contributions from your taxable income. This can help reduce your tax liability in the year you make contributions to your account. In exchange, withdrawals are considered taxable income.

Roth IRA, on the other hand, is funded with money you’ve already paid taxes on. You receive no break on your taxes today, but you get tax-free withdrawals in retirement.

Read More: Traditional Vs Roth IRA: Which Do You Need?

Choosing a traditional vs. Roth IRA usually boils down to whether you think your taxes will be higher now or in retirement. Just keep in mind that you can open either type of account, assuming you meet the income requirements.

IRA Contributions

Annual IRA contributions for 2023 are limited to a maximum of $6,500, or $7,500 if you’re 50 or older. In 2024, annual IRA contributions are limited to $7,000, or $8,000 if you are 50 or older.

You can’t save more than you earn in taxable income in an IRA. Traditional and Roth IRAs both have additional contribution rules.

Traditional IRA Contribution Limits

If you opt for a traditional IRA, the portion of your annual contributions that you may deduct from your taxes depends on your income and whether you (or your spouse) has a workplace retirement plan.

Traditional IRA Tax Deduction Income Limits for 2023 and 2024

Single, head of household or qualifying widow(er) Less than $73,000 Less than $77,000 Full deduction up to the contribution limit
$73,000 to $83,000 $77,000 to $87,000 Partial deduction
More than $83,000 More than $87,000 No deduction
Married filing jointly or qualifying widow(er) Less than $116,000 Less than $123,000 Full deduction up to the contribution limit
$116,000 to $136,000 $123,000 to $143,000 Partial deduction
More than $136,000 More than $143,000 No deduction
Married filing separately Less than $10,000 Less than $10,000 Partial deduction
More than $10,000 More than $10,000 No deduction

Technically, you can make non-deductible contributions to a traditional IRA. You just won’t get a tax break now and will have to pay taxes on any earnings you make when you withdraw them. Alternatively, you can convert them via a backdoor IRA, which we cover below.

Roth IRA Contribution Limits

Your annual income determines how much you can contribute to a Roth IRA, regardless of whether you have access to a workplace retirement plan.

Roth IRA Income Limits in 2023 and 2024

Single, head of household or married filing separately (and you did not live with your spouse at any time during the year) Less than $138,000 Less than $146,000 Up to the annual limit
$138,000 to $153,000 $146,000 to $161,000 A reduced amount
More than $153,000 More than $161,000 Zero
Married filing jointly or qualified widow(er) Less than $218,000 Less than $230,000 Up to the annual limit
$218,000 to $228,000 $230,000 to $240,000 A reduced amount
More than $228,000 More than $240,000 Zero
Married filing separately Less than $10,000 Less than $10,000 A reduced amount
More than $10,000 More than $10,000 Zero

If your income exceeds the amounts listed in the table above, you will not be able to contribute directly to a Roth IRA, though you may be able to contribute to a Roth 401(k) or perform a backdoor Roth conversion, covered below.

IRA Withdrawals

After decades of building your balance, eventually the day comes when you start to withdraw money from your IRA account.

If you’re 59 ½ or older, you can take withdrawals from any type of retirement plan penalty-free. You’ll owe taxes on any money you take out of a traditional IRA based on your current income tax bracket.

Withdrawals from a Roth IRA are tax free, but there are a few rules to keep in mind. If it’s been less than five years since you first funded a Roth account, you may owe taxes (and potentially a penalty) on withdrawals of earnings.

Another thing to remember: Once you reach 72, you will also be required to start withdrawing a percentage from your traditional IRA in the form of required minimum distributions (RMDs). Roth IRAs are not currently subject to RMDs.

IRA Early Withdrawals

If you need to withdraw money from a traditional IRA before you turn 59 ½, you’ll owe a 10% early withdrawal penalty plus income taxes on the amount.

There are a few early withdrawal exceptions that will save you from the early withdrawal penalty (but not the taxes):

  • A first-time home purchase (withdrawal up to $10,000)
  • The birth or adoption of a child (withdrawal up to $5,000)
  • Qualified higher education expenses
  • Qualified medical expenses
  • Health insurance premiums when you’re unemployed
  • Substantially equal periodic payments under Rule 72(t)
  • You have died and the funds are withdrawn by a beneficiary

If you are making an early withdrawal from a Roth IRA, you can also avoid paying taxes or penalties if you only withdraw contributions you’ve made to your account. (You already paid taxes on these, remember?)

In any case, the general rule of thumb with IRA savings is once the funds are in the account, you don’t touch them until you’ve reached the federally recognized retirement age.

Why Choose an IRA?

Given the big tax advantages afforded by IRAs, opening and contributing to an account might seem like a no-brainer. If you’re still on the fence, here are a few reasons why you might open an IRA:

  • You don’t have a 401(k) or another retirement plan at work. If you don’t have a workplace retirement plan, an IRA is one of your best options to build a nest egg.
  • You have a retirement plan at work but you don’t like the investment options. If your employer’s 401(k) fund options are limited or charge higher fees than you’d like, opening an IRA can give you cheaper, better funds. Just make sure you’re contributing enough to your 401(k) to get any matching contributions, and if you’re contributing to a traditional IRA, remember that your ability to deduct your contributions may be limited, depending on your income.
  • You’ve maxed out contributions to your workplace retirement plan. If you’re a super saver who’s reached the annual limits of your 401(k), you’re still entitled to save more in IRAs. After that, you’ll have to turn to annuities or a taxable investment account.
  • You’ve left your job and need to roll over your funds. You may not have to roll over your old 401(k) balance, but you may want to if you face high fees or limited investments—or if you’re afraid you’ll forget about it. A rollover IRA lets you centralize all of your old work retirement savings.

What Are the Different Types of IRA?

There are special IRAs for virtually every type of retirement saver, from entrepreneurs and non-working spouses, to gold investors and Bitcoin enthusiasts.

Spousal IRA

spousal IRA refers to IRS rules that allow a spouse who doesn’t earn income to fund their own individual retirement account, provided they file a joint tax return with their working spouse. Spousal IRAs can be traditional IRAs or Roth IRAs.

Couples may contribute up to the lesser of their annual taxable income or $12,000 in 2022, $13,000 if one spouse is 50 or older, or $14,000 if both are 50 or older. In 2023, these limits rise to $13,000 if both spouses are under 50, $14,000 if one spouse is 50 or older, or $15,000 if both are 50 or older.

Inherited IRA

An inherited IRA—also known as a beneficiary IRA—is an account that holds assets inherited from a deceased person’s IRA or other defined contribution retirement plan, like a 401(k).

Any person or entity may inherit an IRA from someone who has passed away, although spouses generally have the most flexibility in managing their inherited IRAs.


A Simplified Employee Pension, more commonly known as a SEP IRA, is designed for small business owners and the self-employed. Businesses with any number of employees may adopt a SEP IRA plan, although only the employer (and not employees) typically makes contributions. For the self-employed, this distinction isn’t important.

SEP IRAs offer substantially higher contribution limits than normal IRAs. Employers can contribute up to the lesser of $61,000 in 2022 or 25% of an employee’s income; in 2023, the limit rises to $66,000 or 25% of an employee’s income. Self-employed individuals or employers contributing to their own SEP IRAs may contribute slightly less.


A Savings Incentive Match Plan for Employees—known at a SIMPLE IRA—is a retirement account for businesses with 100 or fewer employees. Unlike the SEP IRA, both employers and employees may contribute to this type of IRA.

Employees can choose whether they want to contribute to a SIMPLE IRA while employers must make contributions. Employee contributions are capped at $14,000 for 2022 and $15,500 for 2023.

Employers may opt to either make contributions equal to 2% of employees’ salary or dollar-for-dollar matching contributions up to 3% of their employees’ salary.

Self-Directed IRA

With most IRAs, the investment choices available to you are limited to stocks, bonds, certificates of deposit (CDs) and funds, like mutual funds or exchange-traded funds (ETFs). A self-directed IRA lets you own and trade a variety of alternative investments, like precious metals, real estate assets or even cryptocurrencies.

While it can be appealing to invest in these non-traditional retirement investments, beware that custodians of self-directed IRAs have limited duties to investigate the assets or the background of the promoter of those assets, leaving them more open to fraud.

Gold IRA

gold IRA is a special type of self-directed IRA that allows you to invest retirement funds in physical gold. Normal IRAs cannot hold physical assets like gold.

Gold IRA companies help you manage the additional paperwork, tax reporting and insurance that are required when you own physical gold in a tax-advantaged account. If you want to add some gold to your retirement savings without the additional hassle or extra cost, you can instead buy the stocks of gold mining companies or gold ETFs in a normal IRA.

Bitcoin IRA

Bitcoin IRA is another type of self-directed IRA that lets you invest for retirement with Bitcoin and other cryptocurrencies. Similar to gold IRAs, Bitcoin IRA providers help you manage the tricky additional work of keeping cryptocurrency holdings in a tax-advantaged account.

Though you can’t hold cryptocurrencies in normal IRAs, you can invest in funds and companies that invest in cryptocurrencies through a standard brokerage.

Rollover IRAs

rollover IRA is simply a standard IRA that holds funds you’ve rolled over from a workplace retirement plan, like a 401(k). If you’re changing jobs, segueing to self-employment or approaching retirement, moving your retirement savings from an old 401(k) to a new IRA might make sense.

Rollover IRAs are also a good idea if your old employer’s 401(k) has limited investment options or if the plan is not available to employees who’ve moved on. Alternatively, you might want to move funds into a Roth IRA to get the advantages of tax-free withdrawals in retirement or to avoid RMDs. If your account isn’t already a Roth account, though, keep in mind that you may owe taxes on the amount you convert.

Backdoor Roth IRA

backdoor Roth IRA is an investing strategy that takes advantage of an IRS tax loophole to allow high-income earners to access Roth IRAs. To simplify a somewhat intricate process, this strategy requires opening a traditional IRA, funding the account and immediately doing a Roth conversion.

How to Open an IRA

Opening a new IRA is simple. If you’re a hands-on investor who likes studying markets and trading stocks, an online brokerage is your best bet. Not sure where to start? Check out our listing of the best online brokers to help you choose a platform.

Hands-off investors who’d rather let others manage their retirement investments should check out a robo-advisor or work with a financial advisor. If you’re somewhere in between, consider building a two- or three-fund index fund or ETF portfolio.

There are other avenues for opening an IRA as well. Specialized self-directed IRA providers offer alternative IRAs like the ones discussed above. In addition, most major banks offer IRAs, although they tend to be limited to holding deposit products, like CDs.


Originally posted on Forbes Adviser.