Individual Retirement Account (IRA)

Detailed Explanation

An Individual Retirement Account (IRA) allows individuals to set aside money for retirement with tax benefits depending on the type of IRA. The two most common types are Traditional IRAs and Roth IRAs. With a Traditional IRA, contributions may be tax-deductible, and taxes are paid upon withdrawal in retirement. With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals are tax-free.

IRA contribution limits are set annually by the IRS and may vary based on age and income. For 2025, the standard contribution limit is $7,000 for those under age 50 and $8,000 for those 50 or older, although income limits can affect eligibility for Roth contributions or tax deductibility for Traditional contributions. IRAs are typically held at banks, brokerages, or other financial institutions and can be invested in a range of assets including stocks, bonds, mutual funds, and ETFs.

There are also less common types of IRAs such as SEP IRAs and SIMPLE IRAs for self-employed individuals and small business owners. IRAs are subject to required minimum distributions (RMDs) beginning at age 73 for Traditional IRAs (as of 2025), while Roth IRAs are not subject to RMDs during the owner’s lifetime.

Example

John, age 40, contributes $6,500 to a Roth IRA in 2025. His income is under the Roth IRA eligibility threshold, so he qualifies to contribute the full amount. Because he uses after-tax dollars, his qualified withdrawals in retirement will be tax-free.

Key Articles Related To IRAs

• The Best IRA Accounts (Traditional And Roth) Of 2025
• IRA Contribution Limits And Income Limits

Related Terms

401(k): A retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out.

Contribution Limit: The maximum amount an individual is allowed to contribute to a retirement account in a given year.

Required Minimum Distribution (RMD): The minimum amount that must be withdrawn annually from certain retirement accounts starting at a specific age.

Roth IRA: A type of IRA where contributions are made with after-tax dollars and qualified withdrawals are tax-free.

Traditional IRA: A type of IRA where contributions may be tax-deductible and withdrawals are taxed as ordinary income.

FAQs

Can I contribute to both a Traditional IRA and a Roth IRA? 

Yes, but your total contributions to all IRAs cannot exceed the annual limit.

What happens if I exceed the IRA contribution limit?

You may be subject to a 6% excise tax on the excess contribution unless corrected.

Are IRA contributions tax-deductible?

Traditional IRA contributions may be deductible depending on income and other retirement coverage. Roth IRA contributions are not deductible.

When can I withdraw from my IRA without penalty?

Generally, at age 59½. Earlier withdrawals may incur a 10% penalty unless an exception applies.

Do IRAs have income limits?

Yes, income limits affect Roth IRA contributions and Traditional IRA deductibility based on tax filing status and employer plan participation.