• IRAs are tax-advantaged retirement accounts designed to help you save for the future.
  • Contributions are limited to $7,000 annually or $8,000 if you’re 50 and older (as of 2025).
  • IRAs are often combined with other retirement plans, such as a 401(k) and personal savings, to help you achieve your financial goals. 

If you're thinking about saving towards retirement, then it can be good to understand your options and how they might best fit into your overall strategy. Chances are you might have heard of tools like an IRA. But what is an IRA and how can it be used to help build your wealth?

What is an IRA?

An IRA or "individual retirement account" is a tax-advantaged account intended to help you save for the future. Unlike a regular investment account, the IRS gives you special tax breaks to encourage its usage. Over time, your contributions to the account have the potential to grow in value and help provide income when you’re ready to retire. 

How Does an IRA Work?

An IRA works very similar to a regular investment account except that it’s entitled to special tax benefits. Generally, these will occur either at the time contributions are made or later on when they’re eventually withdrawn — depending on the type of IRA you open. 

With the money you save, you can choose to invest across a wide variety of financial assets:

  • Stocks
  • Bonds
  • Mutual funds
  • ETFs
  • Etc.

As the account grows, the earnings are essentially shielded from taxes. You do not have to report them on your individual tax returns as long as no withdrawals are made.

Once you reach age 59-½, you may start taking withdrawals as needed. Taxes may or may not apply depending on the type of IRA that was used. If withdrawals are taken before the age of 59-½, then they may be subject to income taxes and a 10% penalty by the IRS.[1]

Who Can Contribute to an IRA?

Anyone with earned income (wages, tips, commissions, etc.) may be eligible to contribute to an IRA. This will also depend on your income level, tax filing status, and whether or not you or your spouse also participates in a workplace retirement plan such as a 401(k). You can always find the latest IRA information on the IRS website. 

Why Have an IRA?

IRAs give you a unique chance to build towards your financial future. Unlike a regular investment account, saving to this account may be more efficient because of the tax breaks it offers. Additionally, not having to pay taxes as the money grows could help maximize years of compounding potential.

IRAs can also provide some diversity in your overall retirement strategy. Whereas a 401(k) may limit participants to a certain provider and limited investment options, IRAs can be opened anywhere you choose. Plus, you get to decide which types of investments to choose.

What Are the Different Types of IRAs?

After you understand the basics of an IRA, the next question to ask is, "What IRA account type I should I get?" 

There are several types of IRAs, and each one carries its own unique set of rules and benefits. Here’s what you’ll need to know.

Traditional IRA

A traditional IRA works similarly to other workplace retirement plans. 

  • You won’t pay taxes on contributions for the tax year that they’re made (as long as you meet the IRS requirements). The deadline is usually Tax Day (April 15th) of the following year. 
  • Earrings will grow tax-deferred.
  • Once the money is eventually withdrawn in retirement, taxes will be due (since it will be considered taxable income).

The 2025 contribution limit is $7,000 for those younger than age 50, or $8,000 for those 50 and older.[2]

Traditional IRAs may be ideal for those who believe they will be in a lower tax bracket in the future than they are now. This could be due to a variety of reasons such as being in your peak earnings years or foreseeing lower expenses throughout retirement.

Roth IRA

Roth IRAs work the opposite of a traditional IRA. Instead of taking the tax break now, you get it in the future.

  • Contributions are made with after-tax money. You do not get a tax deduction in the year that you make your contribution.
  • Earnings grow tax-exempt.
  • After age 59-½, withdrawals can be made tax-free.

Just like a traditional IRA, the 2025 contribution limit is $7,000, or $8,000 if you’re age 50 or older.[2] Note that this contribution limit is the combination of what you save to a traditional and Roth IRA. In other words, you can’t contribute $7,000 to both. 

Roth IRAs may be ideal for those who believe they’ll be in a higher tax bracket in the future than they are now. By paying the IRS now, you may enjoy tax-free income throughout retirement.

Rollover IRA

A rollover IRA is simply a traditional IRA that someone creates using funds from an old retirement plan. A common example is someone who leaves their job but has a 401(k) with that employer. Rather than leave their money in this old 401(k), they can instead “roll” it over to a financial provider of their choice.

Rollover IRAs help your retirement savings maintain their tax-deferred status. Beyond that, it gives you more control and the ability to invest in assets of your choice.

SEP IRA 

A SEP IRA or “Simplified Employee Pension Individual Retirement Account” is a retirement plan that’s available to small businesses or those who are self-employed. This even includes people who earn extra money from side hustles but also have a full-time job.

A SEP IRA allows contributions to contribute from two perspectives:

  • An employee, you can save up to $7,000 (or $8,000 if you’re age 50 and older) just like a regular IRA.[3]
  • As the employer, you can save up to 25% of compensation or $70,000 (as of 2025), whichever is less.[3]

SEP IRAs can help business owners and side hustlers reduce their taxable income and how much will be owed to the IRS. They’re also easy to set up and very flexible.

SIMPLE IRA

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) is another retirement plan designed for small businesses — generally those with 100 or fewer employees. It’s ideal for companies that are too big to use a SEP IRA but too small to offer a 401(k) plan. 

Custodial IRA

A custodial IRA is a retirement account that’s owned by a minor but managed by an adult. It can be either a traditional or Roth IRA.

A common scenario is a teenager who works a part-time job and wants to invest for the future. Their parent or guardian can help them set up the account and maintain it until the minor reaches the age of majority.

IRA vs. 401(k): What’s the Difference?

IRAs and 401(k) plans are separate types of retirement accounts that can each play a valuable role in your overall financial strategy. To get the most out of them, it’s important to understand their key differences:

  • 401(k) plans are only available to the employees of the business that offers it. IRAs are open to all individuals with earned income and can be set up anywhere they wish.
  • 401(k) plans have higher contribution limits. As of 2025, you can save up to $23,500 (or $31,000 if you’re age 50 and older).[2]
  • Many employers often also choose to make matching contributions on behalf of their 401(k) participants. Employers do not contribute to an individual’s IRA unless it is a SEP IRA or SIMPLE IRA.
  • 401(k) participants are limited to only the investment options offered by the plan. IRAs can be invested in securities of your choice.
  • Many 401(k) plans are traditional style, although some are now beginning to offer Roth options. IRAs can easily be created as either type.
  • High-income earners might be limited in their eligibility to contribute to an IRA. However, 401(k) plans don’t have the same income restrictions.
  • 401(k) plans generally charge administrative fees. Many IRAs do not.

Can I Borrow From My Traditional IRA?

Unfortunately, you can't borrow money or take a loan from an IRA. However, first-time homebuyers can withdraw up to $10,000 (or $20,000 for married couples filing jointly) penalty-free from your IRA.[4]

The IRS also allows exceptions for hardship withdrawals from IRAs. A hardship withdrawal is defined as an “immediate and heavy financial need” such as excessive medical bills or repairs for the damage to your primary residence. As long as you can prove that the money was withdrawn for a qualifying event, then you won’t be subject to the 10% penalty.

Roth IRAs are also unique in that the contributions can be withdrawn from the account at any time without penalty or tax. This is because, technically, you’ve already paid taxes on these funds. It’s only the earnings portion of a Roth IRA that must remain untouched until age 59-½, or it will be subject to the early withdrawal penalty.

Required Minimum Distributions

Required minimum distributions, or RMDs, are mandatory withdrawals from a retirement account once you reach a certain age. As of 2025, RMDs will begin the year you turn age 73 and are calculated based on an IRS life expectancy factor.[5]

RMDs are required for both IRAs and 401(k)s. However, they only apply to traditional-style accounts since no taxes have been paid on these funds. Because Roth-style plans were funded with post-tax money, they are exempt from RMDs.

Final Thoughts

IRAs can be a helpful and efficient way to save for retirement. Their flexibility and range of investment options can make them advantageous. However, you may be limited in your ability to contribute to an IRA based on your income or other factors. Consider the pros and cons and how it may help your overall retirement savings strategy.