What Is IRA?
An IRA is a tax-advantaged individual retirement account. Learn about Traditional vs Roth IRAs, contribution limits, and how to open one.
Definition
An IRA (Individual Retirement Account) is a tax-advantaged investment account you open on your own (not through an employer) to save for retirement. Unlike a 401(k), which is tied to your job, an IRA gives you complete control over where you open it, what you invest in, and how you manage it.
There are two main types: Traditional IRA (contributions may be tax-deductible, withdrawals are taxed as income in retirement) and Roth IRA (contributions are made with after-tax dollars, but withdrawals in retirement are completely tax-free). For 2026, the contribution limit is $7,000 per year ($8,000 if age 50+). You can contribute to both a 401(k) and an IRA.
IRAs offer far more investment choices than most 401(k) plans. Through a self-directed IRA at a brokerage like Fidelity, Schwab, or Vanguard, you can invest in individual stocks, bonds, ETFs, mutual funds, REITs, and more. This flexibility is a major advantage over the limited menu in most employer plans.
Real-World Example
After maxing out your employer match on your 401(k), you open a Roth IRA at Fidelity and contribute $7,000 per year invested in a total stock market index fund. After 30 years of contributions growing at 8% annually, your Roth IRA is worth roughly $794,000 -- and every penny can be withdrawn completely tax-free in retirement because you already paid taxes on the contributions.
Why It Matters
An IRA should be the second priority for most investors after capturing the 401(k) employer match. The Roth IRA in particular is one of the most powerful wealth-building accounts available because tax-free growth over decades can save hundreds of thousands in taxes. Young investors especially benefit from Roth IRAs because they are likely in lower tax brackets now than they will be in retirement.
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Frequently Asked Questions
What is the difference between a Traditional and Roth IRA?
Traditional IRA contributions may be tax-deductible and withdrawals are taxed as income. Roth IRA contributions are not deductible but withdrawals in retirement are tax-free. The Roth is generally better for people who expect higher taxes in the future.
Can I have both a 401(k) and an IRA?
Yes. You can contribute to both a 401(k) and an IRA in the same year, subject to each account's separate contribution limits. The common strategy is to contribute to your 401(k) up to the employer match, then max out a Roth IRA, then go back to your 401(k).
When can I withdraw from an IRA without penalty?
Generally at age 59 1/2. With a Roth IRA, you can withdraw your contributions (not earnings) at any time without penalty. There are also exceptions for first-time home purchases (up to $10,000), education expenses, and certain hardships.
How do I open an IRA?
Open one online at any major brokerage (Fidelity, Schwab, Vanguard). The process takes about 15 minutes. You will need your Social Security number, bank account for funding, and to choose between Traditional and Roth.
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