What Is an IRA?
An Individual Retirement Account — the tax-advantaged account you open on your own to build retirement wealth outside of your employer's plan.
$7,000
2026 Limit
$8,000
Catch-Up (50+)
4 Types
Traditional/Roth/SEP/SIMPLE
What Is an IRA?
An IRA (Individual Retirement Account) is a tax-advantaged savings account designed for retirement. The "individual" part means you open and manage it yourself — unlike a 401(k), which is tied to your employer. You choose the brokerage, the investments, and the contribution schedule.
The IRS gives IRAs special tax treatment to incentivize retirement saving. Depending on the type of IRA, you either get a tax deduction when you contribute (Traditional IRA) or tax-free withdrawals when you retire (Roth IRA). Either way, your money grows tax-deferred — no taxes on dividends, interest, or capital gains while the money stays in the account.
Anyone with earned income can open an IRA. You do not need an employer to sponsor one. You can open one at Fidelity, Schwab, or Vanguard in 10 minutes online and start investing immediately.
Types of IRAs Compared
| Feature | Traditional | Roth | SEP | SIMPLE |
|---|---|---|---|---|
| Who Can Use | Anyone with earned income | Income under $165K (single) / $246K (married) | Self-employed / small biz owners | Small biz (under 100 employees) |
| 2026 Contribution Limit | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) | 25% of income, up to $70,000 | $16,500 ($17,000 if 50+) |
| Tax on Contributions | Tax-deductible (usually) | After-tax (no deduction) | Tax-deductible | Tax-deductible |
| Tax on Withdrawals | Taxed as ordinary income | Tax-free | Taxed as ordinary income | Taxed as ordinary income |
| Required Minimum Distributions | Starting at age 73 | None (lifetime) | Starting at age 73 | Starting at age 73 |
| Best For | High earners wanting tax break now | Young investors expecting higher future income | Self-employed with high income | Small business retirement plan |
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How to Open an IRA
Choose a brokerage
Fidelity, Schwab, and Vanguard are the three best options. All offer $0 trading commissions, excellent index funds, and no account fees. Pick whichever interface you prefer — the investments are nearly identical.
Choose Traditional or Roth
If you are under 40 and not in the highest tax bracket, choose Roth. If you are in peak earning years and expect lower income in retirement, choose Traditional. When in doubt, Roth is almost always the better default.
Fund the account
Transfer money from your bank account. You can contribute up to $7,000 for 2026 ($8,000 if 50+). You do not have to contribute the maximum — any amount helps.
Buy investments (do not skip this)
Depositing money is not the same as investing it. You must buy investments inside the IRA. A total market index fund (VTI, VTSAX, FZROX) or target-date fund is all most people need.
Glen's Take
If you do not have an IRA, stop reading and open one right now. It takes 10 minutes and is the single best financial decision most people can make.
The order of operations for most people: (1) get your employer's 401(k) match (free money), (2) max out a Roth IRA ($7,000/year), (3) go back and max your 401(k). If you are self-employed, a SEP IRA lets you stash up to $70,000/year — massively more than a regular IRA.
$7,000/year in a Roth IRA from age 25 to 65, invested in an S&P 500 index fund at 10% average returns, grows to approximately $3.4 million — completely tax-free. That is the power of combining an IRA with compound interest and time.
Frequently Asked Questions
What is an IRA?
An IRA (Individual Retirement Account) is a tax-advantaged account specifically designed for retirement savings. Unlike a 401(k), which is offered through an employer, you open an IRA on your own at a brokerage. The main types are Traditional IRA (tax-deductible contributions, taxed withdrawals) and Roth IRA (after-tax contributions, tax-free withdrawals).
How much can I contribute to an IRA in 2026?
The 2026 IRA contribution limit is $7,000 if you are under 50, or $8,000 if you are 50 or older (includes a $1,000 catch-up contribution). This limit is shared across ALL of your IRAs — if you have both a Traditional and Roth IRA, the total contributions to both cannot exceed $7,000/$8,000.
Should I choose a Traditional or Roth IRA?
Choose a Roth IRA if you expect to be in a higher tax bracket in retirement (most young people). Choose a Traditional IRA if you are in peak earning years and expect lower income in retirement. When in doubt, choose Roth — tax-free withdrawals, no required minimum distributions, and more withdrawal flexibility give it an edge for most people.
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. The optimal order is: (1) contribute to your 401(k) up to the employer match, (2) max out your Roth IRA, (3) go back and max out the rest of your 401(k). However, if you have a 401(k) and your income is above certain thresholds, your Traditional IRA contributions may not be tax-deductible.
What is a SEP IRA?
A SEP IRA (Simplified Employee Pension) is a retirement account for self-employed individuals and small business owners. The 2026 contribution limit is up to 25% of net self-employment income, with a maximum of $70,000. This is dramatically higher than a regular IRA's $7,000 limit, making it extremely valuable for high-earning self-employed people.
Recommended Resources
Tools & books I actually use and recommend
Interactive Brokers
Low commissions, global market access, and professional-grade tools. This is where I hold my positions.
Open an AccountA Random Walk Down Wall Street
Burton Malkiel's classic case for index investing. The book that convinced millions to stop stock-picking.
View on AmazonThe Intelligent Investor
Ben Graham's timeless guide to value investing. The book Warren Buffett calls "the best investing book ever written."
View on AmazonSome links above are affiliate links. I only recommend products I personally use. See my full disclosures.
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