An individual retirement account, or IRA, is a tax-advantaged account you open on your own at a brokerage rather than through an employer. IRAs are a flexible complement to a workplace plan because you choose the provider and can invest in nearly any stock, bond, or fund. The two main flavors, traditional and Roth, differ mainly in when you get the tax break.
Traditional versus Roth taxation
A traditional IRA may give you a tax deduction on contributions today, and the money grows tax-deferred until you pay ordinary income tax on withdrawals in retirement. A Roth IRA gives no upfront deduction, but qualified withdrawals in retirement are entirely tax-free, including all the growth. The right choice depends largely on whether you expect your tax rate to be higher now or in retirement. Roth accounts also let you withdraw your own contributions at any time without tax or penalty, adding flexibility.
Contribution limits and earned income
For 2025 you can contribute up to 7,000 dollars across your IRAs, or 8,000 dollars if you are 50 or older, and these caps are indexed over time. You must have earned income, such as wages or self-employment income, at least equal to what you contribute. A spousal IRA lets a non-working spouse contribute based on the working spouse's income when filing jointly. The limit is a combined ceiling, so money split between a traditional and a Roth IRA still counts against the same total.
Income limits and deductibility
Roth IRA eligibility phases out at higher incomes; for 2025 the ability to contribute directly shrinks between 150,000 and 165,000 dollars of modified adjusted gross income for single filers and between 236,000 and 246,000 dollars for married couples filing jointly. Traditional IRA contributions are always allowed if you have earned income, but the deduction phases out at certain income levels when you or your spouse are covered by a workplace plan. High earners locked out of a direct Roth contribution sometimes use a backdoor Roth strategy instead. Because these thresholds shift yearly, always check the current figures before contributing.
Withdrawals, penalties, and RMDs
Both account types generally impose a 10 percent penalty on earnings withdrawn before age 59 and a half, with exceptions such as a first home purchase or qualified education costs. A qualified Roth withdrawal also requires the account to have been open at least five years. Traditional IRAs require minimum distributions starting at age 73, while Roth IRAs have no required distributions during the owner's lifetime. This makes Roth accounts especially useful for leaving money invested longer or passing it to heirs.
A 30-year-old contributes 7,000 dollars a year to a Roth IRA and earns a 7 percent average return. After 35 years the account could hold roughly 970,000 dollars, and because it is a Roth, qualified withdrawals of that entire balance would be free of federal income tax.
Key takeaways
- You open an IRA yourself at a brokerage, gaining a wider investment menu than most 401(k)s.
- Traditional IRAs may deduct contributions now; Roth IRAs deliver tax-free qualified withdrawals later.
- The 2025 limit is 7,000 dollars, or 8,000 dollars at age 50 and up, and requires earned income.
- Roth IRAs have no lifetime required distributions and allow contribution withdrawals anytime.
Common mistakes
- Contributing to a Roth IRA while over the income limit, which can trigger an excess-contribution penalty.
- Forgetting that the annual limit is shared across all your IRAs combined.
- Assuming a traditional IRA contribution is deductible when a workplace plan and high income disallow it.
FAQ
Can I have both an IRA and a 401(k)?
Yes. You can contribute to both in the same year, though a workplace plan and higher income can limit whether your traditional IRA contribution is tax-deductible.
What is the five-year rule for Roth IRAs?
Earnings come out tax-free only if the account has been open at least five years and you are at least 59 and a half; your own contributions can be withdrawn anytime.