What Is an Individual Retirement Account (IRA)?
7 Min Read | Last updated: July 23, 2026
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Learn what an Individual Retirement Account (IRA) is and explore the different types, including their benefits, withdrawal rules, and contribution guidelines.
At-A-Glance
- An individual retirement account, or an IRA, is a specific type of account that allows you to save money and invest towards retirement while receiving certain tax advantages.
- There are several types of IRAs, including traditional, Roth, SEP, and SIMPLE IRAs.
- Some IRAs allow employers to make matching contributions to an employee’s retirement.
Working for a living is how we cover our financial obligations, but retirement planning is a key part of your long-term financial security. At some point, the goal is to stop working and enjoy the fruits of your labor, but that can’t happen if you don’t have money invested to generate a retirement income.
An IRA is one way to do that. These retirement accounts offer a number of benefits, but they may not be the right choice for everyone. In this article, we’ll look at some factors you’ll want to keep in mind if you’re considering an IRA.
What Is an Individual Retirement Account (IRA)?
An IRA is a long-term savings account that is used specifically to build retirement savings. There are various types of IRA accounts, each with its own advantages:
- Traditional IRA: With a traditional IRA, contributions are made with pre-tax dollars. The contributions and earnings grow tax-deferred, meaning they aren’t typically taxed until they are withdrawn after age 59 and ½ (see more below).1
- Roth IRA: Roth IRA contributions are made with after-tax dollars. That means that distributions in retirement are generally tax-free.2
- Payroll Deduction IRA: In a payroll deduction IRA, an employee sets up an IRA, which could be a traditional IRA or Roth IRA, and authorizes automatic contributions via payroll deductions.3
- SEP IRA: A Simplified Employee Pension plan (SEP) is set up by the employer (or someone who is self-employed).4 The employer also funds the plan by making direct contributions to an IRA set up for the employee. It often has lower setup and operating costs compared to conventional retirement plans.5
- SIMPLE IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA is set up by the employer and is generally available to almost any small business (under 100 employees). Employers are required to contribute at least 2% of the employees’ annual compensation to it.6 Employees may also choose to contribute to the plan.
Employer-sponsored IRAs can be set up as either traditional or Roth IRAs.6 The difference is whether contributions are made with pre-tax or after-tax dollars. That choice also affects the taxability of distributions in retirement, so it’s a good idea to consult with an accountant before you pick.
IRA Contribution Limits and Withdrawals
The Internal Revenue Service sets maximum annual contribution levels for IRAs every year. In 2026, that limit is $7,500 for individual IRAs, either traditional or Roth. If you’re over 50 years old, the limit goes up to $8,600, so you can “catch up” on contributions in the shortened window before your retirement.7 The IRS has similar rules for 401(K) and other employer-sponsored plans. These limits change each year, so it’s best to check the IRS website for the most up-to-date contribution limits.
You must be over 59 ½ years old to withdraw money from your IRA without incurring a penalty. If you have a traditional IRA, you’ll be required to take withdrawals from your account starting at age 73.8 There are no required minimum distributions (RMDs) from a Roth IRA, regardless of age, because the taxes on those funds were paid before you deposited them into your IRA.9
Early withdrawals (before age 59 ½) from a traditional IRA are penalized at the rate of 10%, and you’ll need to pay income taxes on them.10 There are some exceptions where you can avoid that, like a first-time home purchase or qualified medical expenses, but it’s generally considered a good idea to leave those funds alone as long as you can.11 Be sure to consult a tax professional to determine any specifics to your situation.
Frequently Asked Questions
Yes. You can have an IRA and a 401(k) at the same time. It may be an effective retirement-planning strategy that increases the annual amount you can contribute and reduces your taxable income. While it may be challenging to contribute to both accounts at the same time, it may result in significant savings over time.12
The difference is in how contributions and withdrawals work. Contributions to a Roth IRA are made with after-tax dollars, so withdrawals are tax-free. Since the contributions are after-tax, there are no required minimum distributions (RMDs) under a Roth IRA. Contributions to a traditional IRA are made with pre-tax dollars, which defers the tax liability. However, you’re required to take RMDs once you reach age 70 ½. You then pay taxes when you withdraw the money.13
A Roth conversion is the movement of assets from a traditional, simplified employee pension (SEP), SIMPLE IRA, or a defined-contribution plan such as a 401(k) to a Roth IRA.14 This involves the taxing of any untaxed amounts in the traditional IRA being converted.
The Takeaway
When planning for retirement, it’s best to consider all your options for types of retirement accounts. Understanding the types of IRAs available, their benefits, contribution limits, and tax implications can help you determine whether an IRA is a good choice for you. No matter which one you choose, establishing your investment fund early can help pave the way for a healthy financial future.
1,2 “Individual retirement arrangements (IRAs),” Internal Revenue Service
3 “Payroll Deduction IRA,” Internal Revenue Service
4 “Simplified Employee Pension plan (SEP),” Internal Revenue Service
5 “SIMPLE IRA Plan,” Internal Revenue Service
6 “Payroll Deduction IRAs for Small Businesses,” U.S. Department of Labor
7 “401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500,” Internal Revenue Service
8,9,13 “Retirement plan and IRA required minimum distributions FAQs,” Internal Revenue Service
10,11 “Retirement topics - Exceptions to tax on early distributions,” Internal Revenue Service
12 “How to Save in a 401(k) and IRA in the Same Year,” U.S. News
14 “Retirement plans FAQs Regarding IRAs,” Internal Revenue Service
Kevin D. Flynn is a financial services provider, business coach, and financial writer. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and ten wonderful grandchildren.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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