An IRA, or Individual Retirement Account, is a tax-advantaged account designed to help you save and invest for retirement. Unlike a regular savings or brokerage account, an IRA gives you specific tax breaks that let your money grow more efficiently over time. You can open one at a bank, brokerage, mutual fund company, or other financial institution, and you choose how the money inside gets invested.
How an IRA Works
An IRA is essentially a container that holds your investments and applies special tax rules to them. You contribute money each year up to a set limit, then invest that money in stocks, bonds, mutual funds, ETFs, or other eligible assets. The gains on those investments grow without being taxed each year, which allows your balance to compound faster than it would in a taxable account.
The key distinction from a standard brokerage account is the tax treatment. In a regular account, you owe taxes on dividends, interest, and capital gains every year. Inside an IRA, those taxes are either deferred until you withdraw the money or eliminated entirely, depending on which type of IRA you use.
Traditional IRA
A traditional IRA lets you deduct your contributions from your taxable income in the year you make them, as long as you qualify. If you contribute $5,000 and you’re in the 22% tax bracket, that deduction saves you $1,100 on your tax bill right away. Your investments then grow tax-deferred, meaning you won’t owe anything on gains or dividends while the money stays in the account.
The trade-off comes later. When you withdraw money in retirement, every dollar of deductible contributions and earnings is taxed as ordinary income. The bet you’re making is that your tax rate in retirement will be lower than it is now, so deferring taxes works in your favor. If you expect to earn less in retirement than you do during your working years, a traditional IRA often makes sense.
Whether your contributions are fully deductible depends on your income and whether you or your spouse have access to a workplace retirement plan like a 401(k). If neither of you is covered by an employer plan, your contributions are deductible regardless of income. If you are covered, the deduction starts to phase out above certain income thresholds.
Roth IRA
A Roth IRA flips the tax benefit. You contribute money you’ve already paid taxes on, so there’s no upfront deduction. But qualified withdrawals in retirement, including all the investment growth, come out completely tax-free.
That tax-free growth can be powerful over decades. If you contribute $7,000 today and it grows to $40,000 by the time you retire, you won’t owe a penny on that $33,000 in gains. With a traditional IRA, you’d owe income tax on the full $40,000 withdrawal.
Roth IRAs are generally a better fit if you expect your tax rate to be the same or higher in retirement, or if you’re early in your career and currently in a lower tax bracket. There are income limits that restrict who can contribute directly to a Roth IRA, and these limits change annually.
Contribution Limits
For 2026, you can contribute up to $7,500 across all of your IRAs combined, or $8,600 if you’re age 50 or older. That limit applies to the total of your traditional and Roth IRA contributions together. If you put $4,000 into a traditional IRA, you can only put $3,500 into a Roth IRA that same year (assuming you’re under 50).
You can only contribute up to the amount of your taxable compensation for the year. If you earned $5,000 in wages, your IRA contribution limit is $5,000, even though the general cap is higher. Investment income, Social Security benefits, and rental income don’t count as eligible compensation for this purpose.
What You Can Invest In
An IRA can hold almost any standard investment: stocks, bonds, mutual funds, ETFs, index funds, certificates of deposit, annuities, and even real estate in some cases. Most people invest through a brokerage IRA that gives them access to a wide range of funds and individual securities.
There are a few things you cannot hold in an IRA. Life insurance policies of any type are prohibited. Collectibles like artwork, antiques, rugs, gems, stamps, and alcoholic beverages are off-limits. Most gold and precious metal coins are also disallowed, though certain government-minted coins like American Eagles and Canadian Maple Leafs are permitted because of their high mineral purity. You also can’t use IRA funds for derivatives trades that carry unlimited risk, such as writing uncovered call options.
Real estate can technically be held inside an IRA, but the rules are strict. You can’t live in the property, collect rental income personally, or buy property from yourself or close family members. All income and expenses must flow through the IRA itself. Most people who want real estate exposure in an IRA stick with real estate investment trusts (REITs), which are funds that invest in property and trade like stocks.
Withdrawal Rules and Penalties
The IRS considers any withdrawal before age 59½ an early distribution, and it comes with a 10% penalty on top of any income tax you owe. For a traditional IRA, that means you’d pay your regular income tax rate plus the 10% penalty. For a Roth IRA, contributions (the money you put in, not earnings) can always be withdrawn without tax or penalty since you already paid tax on them. Earnings withdrawn early from a Roth are subject to the penalty.
There are several exceptions that let you avoid the 10% penalty on early withdrawals:
- First-time home purchase: Up to $10,000 for buying your first home
- Higher education expenses: Tuition, fees, and other qualified costs for you or your dependents
- Birth or adoption: Up to $5,000 per child for expenses related to a birth or adoption
- Disability: If you become totally and permanently disabled
- Large medical bills: Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
- Health insurance while unemployed: Premiums paid after receiving unemployment compensation for at least 12 weeks
- Emergency expenses: One withdrawal per year up to $1,000 for personal or family emergencies
- Federally declared disasters: Up to $22,000 if you suffered economic loss from a qualifying disaster
- Domestic abuse: Up to $10,000 or 50% of your account (whichever is less) for victims of spousal or partner abuse
- Military reservists: Certain distributions for reservists called to active duty
Even when you qualify for an exception, you still owe regular income tax on traditional IRA withdrawals. The exception only waives the extra 10% penalty.
How to Open an IRA
Opening an IRA is straightforward and usually takes less than 30 minutes. You can set one up at an online brokerage, a bank, a credit union, a mutual fund company, or a robo-advisor. You’ll need your Social Security number, a government-issued ID, and basic personal information like your address and employment details.
When choosing where to open your account, look at three things: the range of available investments, the fees, and the minimum deposit required. Many online brokerages now charge zero commissions on stock and ETF trades and have no minimum balance to open an IRA. Banks and credit unions tend to offer IRAs limited to CDs and savings products, which are safer but typically grow more slowly.
Once the account is open, simply contributing money is not enough. You need to actually invest the funds. A common mistake is depositing cash into an IRA and leaving it sitting in a money market or cash position without buying any investments. The tax advantages of an IRA only matter if your money is invested and growing. If you’re unsure where to start, a low-cost target-date fund that matches your expected retirement year handles diversification and rebalancing automatically.