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What is an
IRA?
An Individual Retirement Account (IRA) is a personal retirement plan that helps you grow your savings with powerful tax advantages. Unlike a simple savings account, an IRA is designed to hold a wide range of investments—stocks, bonds, mutual funds, ETFs, and more—so your money can work harder for your future.
Depending on the type of IRA you choose, your contributions may grow on a tax-deferred basis (Traditional IRA) or with tax-free growth (Roth IRA). Both options make an IRA a cornerstone for long-term retirement planning.
Now that you understand what an IRA is, let’s explore how it works in practice. From key features to eligibility and funding options—use the sections below to dive deeper.
Key Takeaways
| Feature | 401(k) Plan (2025) |
|---|---|
| Who Can Participate | Any employee whose employer offers it |
| Contribution Type | Pre-tax (traditional) |
| Withdrawal Taxation | Taxed as ordinary income |
| Employee Contribution Limit (Age under 50) | $23,500 |
| Catch-Up Contribution (Age 50+) | $7,500 |
| Combined Employee + Employer Limit | $70,000 |
| Annual Compensation Cap | $350,000 |
| Highly Compensated Employee Threshold | $160,000 |
| Early Withdrawal Rules | Penalty-free after age 59½ |
| Required Minimum Distribution Age | 73 years |
| Key Advantages | Tax breaks, high contribution limits |
| Key Disadvantages | Fees, limited investment choices, mandatory withdrawals |
How Does an IRA Work?
When you open an IRA, you decide how much you want to contribute each year (up to IRS limits). You add money directly to the account, and then choose how to invest it in options like mutual funds, ETFs, stocks, or bonds, depending on the provider.
Your money grows with tax advantages: in a Traditional IRA, contributions may be tax-deductible and growth is tax-deferred until withdrawal. In a Roth IRA, you contribute after-tax dollars, but withdrawals in retirement can be completely tax-free.
What are the Benefits of IRA?
The benefits of investing in a 401(k) plan are
- Tax-deductible contributions with a Traditional IRA or tax-free withdrawals with a Roth IRA.
- Your money grows tax-deferred or tax-free, compounding over time.
- Extra $1,000 catch-up contribution allowed once you turn 50.
- Access to a wider range of investments like stocks, bonds, ETFs, and mutual funds.
- You can contribute to an IRA even if you already have a 401(k).
- Roth IRAs let you pass wealth to beneficiaries tax-free.
What are the Types of IRA?
Traditional IRA
A Traditional IRA lets you contribute pre-tax (or tax-deductible) dollars, helping reduce your taxable income in the year you contribute. Your investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. This is the most common type of IRA.
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Roth IRA
With a Roth IRA, contributions are made using after-tax income, meaning you don’t get an upfront tax deduction. However, qualified withdrawals—including earnings—are 100% tax-free in retirement. Roth IRAs are best if you expect to be in a higher tax bracket later.
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SEP IRA (Simplified Employee Pension)
A SEP IRA is designed for self-employed individuals and small business owners. Employers make contributions directly into employees’ accounts (including their own if self-employed). Contributions are tax-deductible and grow tax-deferred until retirement.
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SIMPLE IRA (Savings Incentive Match Plan for Employees)
A SIMPLE IRA is built for small businesses with 100 or fewer employees. Both employer and employee can contribute, with employers required to either match contributions or make fixed contributions. It offers simpler administration than a 401(k).
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Self-Directed IRA (SDIRA)
A Self-Directed IRA gives you full control over investment choices beyond the usual stocks and bonds. You can invest in alternative assets like real estate, private equity, cryptocurrency, or precious metals. These accounts require a specialized custodian and strict IRS compliance.
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Rollover IRA
A Rollover IRA is created when you move money from an employer-sponsored plan like a 401(k) into an IRA. It helps you maintain the tax-deferred status of your retirement savings while gaining more investment flexibility.
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How to Open an IRA?
Before you decide on the provider, ask yourself how much you want to get involved in managing your investments. Then follow these steps to open an IRA:
Decide how much help you want
What type of investor you are - hands-on or hands-off?
- If you’d like to choose and manage your investments, you’ll need an online broker. You’ll need to open an account, and then you can use the account to buy and sell investments yourself.
- If you want to manage your investments in an automated way, consider a Robo-advisor. The Robo-advisor will choose low-cost funds in line with your investment preferences and timeline and rebalance your portfolio.
Choose where to open your IRA
The next step is choosing a provider that fits your preference and the investor type mentioned above.
Open an account
While opening the account, you may be asked a few general information, such as your birthdate, contact details, employment details, and Social Security number.
Fund the account and get started
The next step is to determine how to fund your account. Generally, this is done by rolling over a 401(k), transferring funds from a bank account, or transferring existing IRA assets from a different firm into your new account.
What are the Investment Options of IRA?
Your IRA investment options depend on the custodian you choose. Unlike a 401(k), IRAs usually provide a much wider range of choices.
Common Options
Stocks, bonds, mutual funds, and ETFs are the most widely used.
Other Choices
Target-date funds, index funds, CDs, and money market funds.
Self-Directed IRA Options
Real estate, private equity, cryptocurrency, and precious metals (requires a specialized custodian).
Tip: Use the flexibility of an IRA to diversify your portfolio and match your investments with your risk tolerance and long-term goals.
FAQS
Is a rollover ira a traditional ira?
Yes. A rollover IRA is a Traditional IRA funded with assets moved tax-free from a workplace plan.
When can you withdraw from ira?
You can take penalty-free withdrawals starting at age 59½. Earlier withdrawals may face a 10% penalty unless exceptions apply.
When do you pay taxes on ira withdrawals?
Traditional IRA withdrawals are taxed as ordinary income in retirement. Roth IRA withdrawals are tax-free if the account is 5 years old and you are at least 59½.
Can you borrow against an ira?
No. IRAs don’t allow loans, but you can take distributions or a 60-day rollover.
Do you report roth ira on taxes?
Yes. Contributions aren’t deductible, but you must report them and any conversions. Qualified withdrawals are not taxed.
