IRA

An IRA, or Individual Retirement Account, is a personal savings account that offers tax advantages to help people save money for retirement. Unlike a 401(k), which is tied to an employer, an IRA is opened directly by an individual through a bank, brokerage, or financial institution. This makes it a flexible option for workers who want to save beyond their workplace plan or who do not have access to one.

There are two main types of IRAs:

• Traditional IRA: Contributions may be tax-deductible depending on your income and whether you have a workplace retirement plan. The money grows tax-deferred, meaning you pay taxes when you withdraw funds in retirement.
• Roth IRA: Contributions are made with after-tax dollars, so there is no upfront deduction. However, qualified withdrawals in retirement are completely tax-free, including the growth.

For 2026, the IRA contribution limit is $7,000 per year. People aged 50 and older can contribute an extra $1,000 as a catch-up contribution, bringing their total to $8,000. These limits apply across all IRAs combined, so splitting contributions between a Traditional and Roth IRA is allowed as long as the total stays within the cap.

Roth IRAs also have income limits. For 2026, the ability to contribute to a Roth IRA begins to phase out at $150,000 for single filers and $236,000 for married couples filing jointly. Traditional IRA contributions, by contrast, are open to anyone with earned income, though the deductibility depends on income and plan access.

A practical example: a 35-year-old freelance writer has no employer retirement plan. She opens a Roth IRA and contributes $500 per month. Over time, her investments grow inside the account. When she retires, qualified withdrawals come out tax-free, which can be a significant benefit if tax rates rise in the future.

IRAs also allow a wide range of investment choices, including stocks, bonds, mutual funds, and ETFs. Early withdrawals before age 59 and a half typically trigger taxes and a 10 percent penalty, with some exceptions.

RetireGrader is not a financial advisor or fiduciary. This definition is for educational purposes only.