An Individual Retirement Account (IRA) is a tax-advantaged retirement savings account that allows individuals to save and invest for retirement while receiving valuable tax benefits. IRAs provide an essential tool for building retirement wealth outside of employer-sponsored plans, offering individuals control over their investment choices and retirement planning strategies.
Several types of IRAs exist, each with distinct tax treatment and rules. Traditional IRAs allow tax-deductible contributions (subject to income limits if you’re covered by an employer plan), with investments growing tax-deferred and distributions taxed as ordinary income in retirement. Roth IRAs accept after-tax contributions with no immediate tax deduction, but qualified distributions in retirement are completely tax-free, including all growth and earnings. SEP IRAs (Simplified Employee Pension) are designed for self-employed individuals and small business owners, allowing higher contribution limits. SIMPLE IRAs (Savings Incentive Match Plan for Employees) serve small businesses with 100 or fewer employees, combining employer and employee contributions.
For 2024, annual contribution limits are $7,000 for individuals under age 50, and $8,000 for those age 50 and older (including a $1,000 catch-up contribution). These limits apply across all traditional and Roth IRAs combined. SEP IRA contribution limits are significantly higher, allowing up to 25% of compensation or $69,000 (2024 limit), whichever is less.
Traditional IRA contributions may be fully deductible, partially deductible, or nondeductible depending on your income, filing status, and whether you’re covered by an employer retirement plan. Roth IRA contributions are never deductible, and contribution eligibility phases out at higher income levels.
Withdrawal rules vary by IRA type. Traditional IRA distributions before age 59½ generally incur a 10% early withdrawal penalty plus income taxes, with exceptions for first-home purchases, qualified education expenses, certain medical expenses, and other specific situations. Roth IRAs allow tax-free and penalty-free withdrawal of contributions at any time, though earnings withdrawals before age 59½ may face taxes and penalties unless qualifying exceptions apply.
Required Minimum Distributions (RMDs) begin at age 73 for traditional IRAs, requiring account holders to withdraw specific amounts annually. Roth IRAs have no RMDs during the owner’s lifetime, making them attractive for wealth transfer strategies.
« Back to Glossary Index