An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help individuals accumulate money for retirement outside of an employer-sponsored plan.
IRAs are held at banks, brokerage firms, and other financial institutions and can invest in a broad range of assets including stocks, bonds, mutual funds, ETFs, and CDs.
The tax benefits of an IRA — whether upfront deductions or tax-free growth — can meaningfully increase the long-term value of your retirement savings compared to an equivalent taxable account, particularly when combined with the power of compound interest over decades.
This guide covers the main types of IRAs, 2025 contribution limits (with a note on 2026 limits), income eligibility rules, and the key decisions involved in choosing the right account for your situation.
Types of IRA Accounts
The IRS recognizes several types of IRAs, each with different tax treatment, contribution limits, and eligibility rules.
According to the IRS, the most widely used are the Traditional IRA and the Roth IRA, followed by the SEP IRA and SIMPLE IRA for self-employed individuals and small business owners.
Traditional IRA
A Traditional IRA allows you to contribute pre-tax dollars (if you meet deductibility requirements), invest them tax-deferred, and pay ordinary income tax only when you withdraw funds in retirement.
- Contributions: May be tax-deductible depending on your income and whether you or your spouse participate in a workplace retirement plan.
- Growth: Tax-deferred — you owe no tax on dividends, interest, or capital gains while the money remains in the account.
- Withdrawals: Taxed as ordinary income. Withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty in addition to income tax, with some exceptions.
- Required Minimum Distributions (RMDs): Beginning at age 73 (as of 2026), you must take annual minimum distributions regardless of whether you need the money.
Roth IRA
A Roth IRA is funded with after-tax contributions, but qualified withdrawals — including all investment growth — are entirely tax-free.
There are no RMDs during the account owner's lifetime, making Roth IRAs particularly flexible for estate planning and long-term wealth transfer.
Roth IRAs are subject to income phase-out limits described in the contribution limits section below.
For a full comparison of Roth IRA rules and strategies, see our dedicated Roth IRA guide.
SEP IRA
A Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners. Contributions are made by the employer (which may be the self-employed person themselves), not the employee.
- Contribution limits (2025): Up to 25% of compensation or approximately $70,000, whichever is less. Verify the 2026 limit at IRS.gov.
- Tax treatment: Contributions are tax-deductible for the employer. Growth is tax-deferred, and withdrawals are taxed as ordinary income.
- Simplicity: SEP IRAs have minimal administrative requirements compared to 401(k) plans, making them attractive for sole proprietors and small firms.
- RMDs: Apply beginning at age 73, same as Traditional IRAs.
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is available to businesses with 100 or fewer employees. Unlike a SEP IRA, both employees and employers can contribute.
- Employee contributions (2025): Up to $16,000 (or $19,500 for those age 50 and older). Verify 2026 limits at IRS.gov.
- Employer contributions: Required — either a 3% match of employee compensation or a 2% non-elective contribution for all eligible employees.
- Early withdrawal penalty: Withdrawals within the first two years of plan participation are subject to a 25% penalty (rather than the standard 10%).
IRA Contribution Limits (2025)
For 2025, the IRS set the combined contribution limit for Traditional and Roth IRAs at $7,000 per individual (under age 50) and $8,000 for individuals age 50 and older (the additional $1,000 is a catch-up contribution).
According to the IRS IRA contribution limits page, these limits apply to the combined total contributed to all Traditional and Roth IRAs you own — not per account.
Contributions for a given tax year may typically be made up until the tax filing deadline (generally April 15 of the following year). The IRS adjusts limits for inflation periodically; verify the current 2026 limits at IRS.gov before contributing.
You may only contribute to an IRA if you have earned income at least equal to your contribution amount. Unearned income (dividends, interest, rental income) does not count as earned income for IRA contribution purposes.
Traditional IRA Deductibility Phase-Out
If you (or your spouse) participate in a workplace retirement plan such as a 401(k), your ability to deduct Traditional IRA contributions phases out above certain income thresholds. For 2025, the phase-out ranges are:
- Single or head of household with a workplace plan: $79,000–$89,000 modified adjusted gross income (MAGI)
- Married filing jointly, covered by a workplace plan: $126,000–$146,000 MAGI
- Married filing jointly, not covered but spouse is: $236,000–$246,000 MAGI
Above the upper threshold, Traditional IRA contributions are non-deductible but can still be made (and may be worth making for potential future conversion to a Roth IRA via a backdoor Roth strategy).
Roth IRA Income Phase-Out
Roth IRA contributions are subject to income phase-outs — above certain income levels, the contribution limit is reduced and eventually eliminated entirely. For 2025:
- Single filers: Phase-out begins at $150,000 MAGI; Roth contributions are eliminated above $165,000
- Married filing jointly: Phase-out begins at $236,000 MAGI; contributions eliminated above $246,000
Verify updated 2026 thresholds at IRS.gov. High-income earners who exceed Roth IRA income limits may use a backdoor Roth conversion strategy, though this involves additional tax considerations.
Traditional IRA vs. Roth IRA: Which May Be Right for You?
The core trade-off between a Traditional and Roth IRA is when you pay taxes: now (Roth) or in retirement (Traditional). The better choice often depends on your current vs. expected future tax rates:
| Factor | Traditional IRA | Roth IRA |
|---|---|---|
| Tax on contributions | Pre-tax (if deductible) | After-tax |
| Tax on growth | Tax-deferred | Tax-free (qualified) |
| Tax on withdrawals | Ordinary income | Tax-free (qualified) |
| RMDs | Yes, starting age 73 | None during owner's lifetime |
| Income limits | Deductibility limits only | Contribution income limits apply |
| Generally favors | Higher earners now; expecting lower rate in retirement | Lower earners now; expecting higher rate in retirement |
If you expect to be in a lower tax bracket in retirement than you are today, a Traditional IRA deduction may save more tax overall.
If you expect your tax rate to be the same or higher in retirement — common for young earners with decades of expected growth ahead — a Roth IRA may be advantageous.
These are general principles; individual tax circumstances vary significantly.
IRA Investment Options and Custodians
An IRA is an account type, not an investment itself. Once you open an IRA at a financial institution (the custodian), you choose how to invest the funds within it. Common investment options include:
- Individual stocks and bonds
- Mutual funds and index funds
- Exchange-traded funds (ETFs)
- Certificates of Deposit (CDs)
- Treasury securities
Self-directed IRAs may also hold alternative assets such as real estate or precious metals, but these come with additional rules, fees, and regulatory complexity.
According to Investor.gov, investors should understand all fees and investment risks associated with their IRA before selecting a custodian or investment strategy.
Early Withdrawal Rules and Exceptions
Withdrawing from a Traditional IRA or SEP IRA before age 59½ generally triggers a 10% early withdrawal penalty on top of ordinary income taxes.
Roth IRA rules are more nuanced: contributions (not earnings) can be withdrawn at any time without penalty, but earnings withdrawn before age 59½ and before the account has been open for five years may be subject to tax and penalty.
The IRS provides several exceptions to the 10% penalty for both Traditional and Roth IRAs, including first-time home purchases (up to $10,000 lifetime), qualified higher education expenses, disability, substantially equal periodic payments (SEPP/72(t) distributions), and others.
These exceptions involve complex rules; consulting a tax professional before taking an early withdrawal is advisable.
Frequently Asked Questions
Can I have both a Traditional IRA and a Roth IRA at the same time?
Yes. You may hold both a Traditional IRA and a Roth IRA simultaneously. However, the combined annual contribution to all Traditional and Roth IRAs cannot exceed the annual limit — $7,000 in 2025 (or $8,000 if age 50 or older).
You can split contributions between the two account types in any proportion, as long as the total does not exceed the limit.
Can I contribute to an IRA if I also have a 401(k) at work?
Yes. Having a 401(k) or other workplace retirement plan does not prevent you from contributing to an IRA. However, your ability to deduct Traditional IRA contributions may be reduced or eliminated depending on your income level.
Roth IRA contributions (which are never deductible) are available regardless of whether you have a workplace plan, subject only to the Roth IRA income phase-out limits. Our guide on how much to contribute to your 401(k) can help you think through how to balance workplace and IRA contributions.
What is the deadline to contribute to an IRA for a given tax year?
You typically have until the federal income tax filing deadline — generally April 15 of the following year — to make IRA contributions for a given tax year.
For example, contributions for the 2025 tax year may typically be made until April 15, 2026.
Tax filing extensions do not extend the IRA contribution deadline.
Can I open an IRA for my child?
A child may contribute to a Roth IRA or Traditional IRA if they have earned income — such as wages from a part-time job.
The contribution cannot exceed the child's earned income for the year or the annual contribution limit, whichever is less.
Starting a Roth IRA early for a child with earned income can allow decades of tax-free growth due to compound interest, though the funds are subject to the same early withdrawal rules as adult accounts.
What happens to my IRA when I die?
IRAs pass to named beneficiaries outside of probate. Most non-spouse beneficiaries are required to withdraw the entire balance of an inherited IRA within 10 years under the SECURE 2.0 Act rules. Spousal beneficiaries have more flexibility, including the option to treat an inherited IRA as their own.
Estate planning for IRAs can be complex — consulting an estate planning attorney is advisable.
Sources & References
- IRS — Individual Retirement Arrangements (IRAs) — https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
- IRS — IRA Contribution Limits — https://www.irs.gov/retirement-plans/ira-contribution-limits
- Investor.gov — Retirement Accounts — https://www.investor.gov/introduction-investing/investing-basics/investment-products/retirement-accounts
- IRS — SEP Plan FAQs — https://www.irs.gov/retirement-plans/sep-plan-faqs
Last updated: April 27, 2026