IRA: What It Is and How It Works in 2026

A Traditional IRA allows you to contribute pre-tax or after-tax dollars depending on your income and whether you or your spouse are covered by a workplace retirement plan. If you meet the IRS eligibility criteria, contributions to a Traditional IRA may be tax-deductible, which can reduce your taxable income for the year you contribute. Your investments grow tax-deferred inside the account — meaning you do not pay taxes on dividends, interest, or capital gains until you withdraw the money. Withdrawals in retirement are taxed as ordinary income, and you are required to begin taking required minimum distributions (RMDs) starting at age 73 (as of 2026) under current IRS rules. To estimate how long your IRA distributions will last, our retirement withdrawal calculator guide can help you model your drawdown rate.

A Roth IRA is funded with after-tax dollars — you do not get a tax deduction for contributions, but your money grows tax-free and qualified withdrawals in retirement are entirely tax-free. To make a full Roth IRA contribution in 2026, your modified adjusted gross income (MAGI) must be below certain IRS thresholds — contributions phase out at higher income levels, and above the upper threshold you may not contribute to a Roth IRA directly at all. Unlike the Traditional IRA, the Roth IRA has no required minimum distributions during the owner's lifetime, making it a useful tool for people who do not need to withdraw all of their retirement savings on a specific schedule. You can withdraw your Roth IRA contributions (not earnings) at any time without taxes or penalties, since you already paid tax on that money. If you want to hold multiple Roth IRAs, see our guide on whether you can have multiple Roth IRAs.

For 2026, the IRA contribution limit is $7,000 per person per year, or $8,000 if you are age 50 or older (the additional $1,000 is called the "catch-up contribution"). This limit applies to your combined contributions across all of your IRAs — if you have both a Traditional and a Roth IRA, your total contributions to both cannot exceed $7,000 ($8,000 if 50+). You must have earned income at least equal to your contribution amount to contribute to an IRA — investment income, Social Security benefits, and pension income do not count as earned income for this purpose. The contribution deadline for a given tax year is typically April 15 of the following year, allowing contributions after December 31 that still count for the prior year. These limits are set by the IRS and may be adjusted annually for inflation. To understand how saving earlier affects your IRA's ultimate value, see our guide on how starting age impacts compound interest.

Whether you can deduct your Traditional IRA contribution depends on your income and whether you or your spouse are covered by a retirement plan at work. If neither you nor your spouse has a workplace plan, you may deduct the full contribution regardless of income. If you or your spouse is covered by a workplace plan, your deduction may be reduced or eliminated above certain MAGI thresholds that the IRS adjusts annually for inflation. Nondeductible contributions to a Traditional IRA are allowed even when you exceed the income thresholds — you simply do not receive the deduction, and the after-tax contributions can be tracked using IRS Form 8606 to avoid double taxation on withdrawal. If you also have an employer 401(k), our guide on investment accounts explains how to think about multiple account types in a broader savings strategy.

Withdrawing money from a Traditional IRA before age 59½ typically results in a 10% early withdrawal penalty in addition to ordinary income tax on the amount withdrawn. The IRS provides exceptions to the 10% penalty for certain circumstances, including a first home purchase (up to $10,000 lifetime), qualified higher education expenses, certain medical expenses, and permanent disability. For Roth IRAs, you can withdraw your contributions (not earnings) at any time without penalty or taxes — but withdrawing earnings before age 59½ and before the account has been open five years may trigger both taxes and the 10% penalty. The IRS Publication 590-B covers all withdrawal rules and exceptions in detail. Our guide on how long your money will last in retirement can help you estimate whether you need to tap your IRA early.

You can open an IRA at most financial institutions, including banks, credit unions, brokerage firms, and online investment platforms that offer IRA accounts. To open an account, you will typically need your Social Security number, government-issued ID, bank account information for funding, and a selection of the type of IRA (Traditional or Roth). Once the account is open, you can choose how to invest your contributions — common options include mutual funds, index funds, ETFs, and individual stocks, depending on the platform. The SEC and FINRA both offer investor education resources to help you understand the investment options available within an IRA. Our guide on how to invest in the S&P 500 covers one of the most widely used index fund strategies for IRA investors.

An IRA and a 401(k) are both tax-advantaged retirement accounts, but they operate differently and serve complementary roles in a retirement savings strategy. A 401(k) is employer-sponsored, may include employer matching contributions, and has a much higher annual contribution limit ($23,500 in 2026, plus $7,500 catch-up if age 50+). An IRA is opened and managed individually, provides more investment flexibility (you choose the brokerage and the investments), and has a lower contribution limit. Many financial advisors suggest contributing enough to a 401(k) to receive any employer match first, then maxing out an IRA for additional tax-advantaged savings — though your personal situation should guide your strategy. The SEC's IRA investor bulletin provides further guidance on comparing account types. For guidance on planning for the long term using these tools, see our guide on how planning and saving helps you build wealth.