What is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is a tax-advantaged account you open on your own to save and invest for retirement. Unlike a 401(k), an IRA isn’t tied to an employer, so anyone with earned income can open one at a brokerage or bank and choose the investments inside it. In exchange for the tax break, the money is meant to stay put until you reach retirement age.

The tax advantage comes in one of two forms depending on the type of IRA: you either deduct your contributions now and pay tax on withdrawals later, or you contribute after-tax money and take qualified withdrawals tax-free. That single choice, when you pay the tax, drives most of the decisions around IRAs.

Types of IRAs

There are four main kinds of IRA. Traditional and Roth IRAs are what most individuals use. SEP and SIMPLE IRAs are built for the self-employed and small businesses, and they allow much larger contributions.

• Traditional IRA. Contributions may be tax-deductible in the year you make them, and the money grows tax-deferred. You pay ordinary income tax on withdrawals in retirement, and required minimum distributions (RMDs) begin at age 73. This is the natural fit when you expect a lower tax rate in retirement than you have today.
• Roth IRA. You contribute after-tax money, so there’s no upfront deduction, but qualified withdrawals in retirement are completely tax-free. Because you’ve already paid the tax, a Roth has no RMDs for the original owner, and you can withdraw your contributions (though not the earnings) at any time without penalty. Roth IRAs also have income limits that cap who can contribute directly.
• SEP IRA. A Simplified Employee Pension IRA lets self-employed people and small business owners contribute up to the lesser of 25% of compensation or $72,000 for 2026, far above the standard IRA limit. Contributions are employer-funded and generally tax-deductible to the business.
• SIMPLE IRA. A Savings Incentive Match Plan for Employees works like a lightweight 401(k) for small businesses. Employees contribute from their paychecks and the employer is required to match or contribute on their behalf, with contribution limits that sit between a standard IRA and a 401(k).

How Much Can I Contribute to an IRA in 2026?

For 2026, you can contribute up to $7,500 to a Traditional or Roth IRA if you’re under 50. Once you turn 50, a catch-up contribution raises the ceiling to $8,600 (an extra $1,100). This limit is combined across all your Traditional and Roth IRAs, not per account, so splitting contributions between the two doesn’t let you save more overall.

You also need earned income at least equal to what you contribute, and you have until the tax-filing deadline the following April to make a contribution for the prior year. SEP and SIMPLE IRAs follow their own, higher limits described above.

Traditional vs. Roth IRA

The choice between a Traditional and a Roth IRA comes down to whether you’d rather take the tax break now or in retirement.

A Traditional IRA rewards you when your tax rate is higher today than it will be in retirement, since you deduct at a high rate and withdraw at a lower one. A Roth rewards the opposite case, and it’s especially attractive for younger savers whose income (and tax rate) is likely to climb.

Roth withdrawals also don’t count toward the income calculations that drive Medicare premiums and Affordable Care Act (ACA) subsidies, which makes Roth balances valuable for controlling taxable income later. Because this decision hinges on your future tax picture, it’s one worth modeling rather than guessing. You can compare the Traditional and Roth paths in ProjectionLab to see how each affects your lifetime tax bill and withdrawal flexibility.

Deductibility and Income Limits

Two separate income tests apply, and they’re easy to confuse.

For a Traditional IRA, anyone with earned income can contribute, but your ability to deduct the contribution phases out if you (or a spouse) are covered by a workplace retirement plan. Without workplace coverage, the deduction is generally available regardless of income.

For a Roth IRA, the limit is on contributing at all. In 2026, the ability to contribute directly phases out between $153,000 and $168,000 of modified adjusted gross income (MAGI) for single filers, and between $242,000 and $252,000 for married couples filing jointly. Above the top of the range, direct Roth contributions aren’t allowed, though a backdoor Roth IRA remains an option for higher earners.

IRA Withdrawal Rules and the Age 59.5 Penalty

IRAs are built for retirement, so the rules discourage tapping them early. Withdrawals from a Traditional IRA before age 59.5 typically trigger a 10% early-withdrawal penalty on top of the ordinary income tax you already owe. A handful of exceptions exist, including a first-home purchase (up to $10,000), qualified education costs, certain medical expenses, and substantially equal periodic payments under Rule 72(t).

Roth IRAs are more forgiving. Because you funded them with after-tax money, you can withdraw your contributions at any age without tax or penalty. The earnings are what’s restricted: to take those out tax-free, the account generally must be at least five years old and you must be past 59.5. This flexibility on contributions is one reason a Roth often doubles as a backstop for savers who want retirement growth without fully locking the money away.

How an IRA Fits Into Your Retirement Plan

An IRA usually works alongside an employer plan rather than replacing it. A common sequence is to contribute enough to a 401(k) to capture the full employer match, then fund an IRA for its broader investment menu and (in the Roth case) tax-free growth, and finally return to the 401(k) if you have more to save. Where an IRA sits in that order depends on your tax situation and what your workplace plan offers.

Because contribution limits, deductibility, and withdrawal timing all interact across accounts, seeing them together helps. You can model your IRA alongside your other accounts in ProjectionLab to test how much to contribute, which account type to prioritize, and when to draw each down in retirement.

Frequently Asked Questions

What is the difference between a Traditional and a Roth IRA? A Traditional IRA gives you a potential tax deduction now and taxes your withdrawals in retirement, while a Roth IRA takes after-tax money now and makes qualified withdrawals tax-free. Traditional IRAs have RMDs starting at 73; Roth IRAs have none for the original owner. Pick Traditional if you expect a lower tax rate in retirement, Roth if you expect a higher one.

How much can I contribute to an IRA in 2026? $7,500 if you’re under 50, or $8,600 if you’re 50 or older, thanks to a $1,100 catch-up. That limit is shared across all your Traditional and Roth IRAs combined, and you need earned income at least equal to your contribution.

Can I have both a 401(k) and an IRA? Yes. You can contribute to both in the same year, and the limits are separate: maxing a 401(k) doesn’t reduce how much you can put in an IRA. Being covered by a workplace plan can, however, limit or eliminate your Traditional IRA deduction at higher incomes, so the Roth or a nondeductible contribution may make more sense in that case.

Who can open an IRA? Anyone with earned income for the year can open and fund a Traditional IRA. Roth IRAs add an income ceiling: for 2026, the ability to contribute directly phases out between $153,000 and $168,000 for single filers and $242,000 and $252,000 for married couples filing jointly.

When can I withdraw from an IRA without penalty? Generally at age 59.5. Withdrawing Traditional IRA funds earlier usually costs a 10% penalty plus income tax, with exceptions for things like a first home, education, or 72(t) payments. Roth contributions (not earnings) can come out anytime tax- and penalty-free.