What Is an IRA? Types, Rules, and How to Choose
Last updated 04/08/2026 by
Ante Mazalin
Edited by
Andrew Latham
Summary:
An IRA (Individual Retirement Account) is a tax-advantaged savings account designed for retirement, available to anyone with earned income regardless of whether they have access to a workplace retirement plan.
There are four main IRA types, each suited to a different financial situation.
- Traditional IRA: Contributions may be tax-deductible; withdrawals in retirement are taxed as ordinary income. Best for those expecting a lower tax rate in retirement.
- Roth IRA: Contributions made with after-tax dollars; qualified withdrawals are completely tax-free. Best for those expecting a higher tax rate in retirement or wanting maximum flexibility.
- SEP-IRA: Designed for self-employed individuals and small business owners, with contribution limits far exceeding standard IRAs — up to $69,000 in 2024.
- SIMPLE IRA: A workplace retirement plan for small businesses with 100 or fewer employees, featuring mandatory employer contributions and lower administrative burden than a 401(k).
IRAs were created by Congress in 1974 through ERISA (the Employee Retirement Income Security Act) to give workers without pension plans a tax-advantaged way to save for retirement.
Today, over 50 million Americans hold IRA assets totaling more than $13 trillion, according to the Investment Company Institute — making IRAs one of the most widely used retirement savings vehicles in the country.
How IRAs Work
An IRA is not an investment itself — it’s an account structure with special tax treatment. Inside the IRA, you can hold stocks, bonds, mutual funds, ETFs, CDs, and other investments. The tax advantage applies to everything inside the account.
Most IRAs are opened at a brokerage, bank, or credit union. The account holder controls the investments — unlike a 401(k), where your employer chooses the investment menu. This flexibility is one of the primary advantages of IRAs over workplace plans.
IRA Types Compared
| Feature | Traditional IRA | Roth IRA | SEP-IRA | SIMPLE IRA |
|---|---|---|---|---|
| Who can open it | Anyone with earned income | Anyone with earned income (income limits apply) | Self-employed, small business owners | Employers with ≤100 employees |
| 2024 contribution limit | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) | Up to $69,000 (25% of compensation) | $16,000 ($19,500 if 50+) |
| Tax on contributions | Pre-tax (deductible) | After-tax (no deduction) | Pre-tax | Pre-tax |
| Tax on withdrawals | Taxed as income | Tax-free (qualified) | Taxed as income | Taxed as income |
| Income limits | No (deductibility phases out) | Yes — phases out above $146K (single) | No | No |
| Required minimum distributions | Yes, at age 73 | None | Yes, at age 73 | Yes, at age 73 |
| Employer contributions | No | No | Yes (employer only) | Yes (mandatory match) |
Traditional IRA
A traditional IRA lets you contribute pre-tax dollars (if eligible) and defer taxes until withdrawal. Deductibility depends on whether you or your spouse has access to a workplace retirement plan and your income level — if neither of you has a workplace plan, contributions are fully deductible at any income.
Withdrawals before age 59½ trigger a 10% early withdrawal penalty plus income tax. At age 73, required minimum distributions (RMDs) force you to begin withdrawing funds whether you need the income or not.
Roth IRA
A Roth IRA inverts the tax structure: you contribute after-tax money, but everything grows tax-free and qualified withdrawals are completely untaxed. There are no RMDs during the owner’s lifetime, making it the most estate-planning-friendly IRA type.
Income limits restrict direct contributions for high earners — in 2024, the phase-out begins at $146,000 for single filers and $230,000 for married filing jointly. High earners can access a Roth IRA through the backdoor Roth strategy: contributing to a non-deductible traditional IRA and then converting.
SEP-IRA
A SEP-IRA (Simplified Employee Pension) is built for self-employed people and small business owners who want to contribute significantly more than the standard IRA limits allow. Contributions can reach up to 25% of compensation or $69,000 in 2024 — whichever is less.
Only employers (including self-employed individuals acting as their own employer) contribute to a SEP-IRA. Employees cannot make their own contributions. If you have employees, you must contribute the same percentage of salary for all eligible employees as you contribute for yourself.
SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a small-business retirement plan for companies with 100 or fewer employees. Employees contribute through salary deferrals, and employers are required to either match up to 3% of compensation or make a 2% non-elective contribution for all eligible employees.
SIMPLE IRAs have a two-year rule: funds cannot be rolled over to a traditional IRA or other plan without penalty during the first two years of participation. After two years, rollovers to a traditional IRA or 401(k) are permitted.
Pro Tip: You can contribute to both a workplace plan (401(k) or SIMPLE IRA) and a personal IRA (traditional or Roth) in the same year. The contribution limits are independent — maxing a 401(k) does not reduce your IRA limit. The deductibility of traditional IRA contributions is what phases out when you have a workplace plan and your income exceeds certain thresholds, not the contribution itself.
IRA Contribution Rules
A few universal rules apply to all IRA types:
- Earned income requirement: You must have earned income (wages, salary, self-employment) at least equal to your contribution. Investment income, Social Security, and pension income don’t count.
- Annual contribution deadline: You can make prior-year IRA contributions up to the tax filing deadline (April 15) — giving you extra time to fund a prior-year IRA after you know your full-year income.
- Spousal IRA: A non-working spouse can contribute to an IRA based on the working spouse’s earned income, as long as you file a joint return.
- Excess contributions: Contributing more than the annual limit triggers a 6% excise tax on the excess amount for each year it remains in the account.
IRA Rollovers and Transfers
When you leave a job, you can roll your 401(k) or other workplace plan into an IRA without triggering taxes — giving you more investment choices and consolidating your retirement accounts. An IRA rollover must be completed within 60 days, or the distribution is treated as taxable income. Direct rollovers (trustee-to-trustee) avoid this risk entirely.
An IRA transfer is distinct from a rollover — it moves funds directly between IRA accounts of the same type with no 60-day window or limit on frequency.
Key takeaways
- An IRA is a tax-advantaged account, not an investment. It can hold stocks, bonds, ETFs, mutual funds, and other assets.
- The four main types — Traditional, Roth, SEP, and SIMPLE — differ by who can use them, contribution limits, and tax treatment.
- Traditional and Roth IRAs share the same $7,000 annual limit ($8,000 if 50+) in 2024. SEP-IRAs can receive up to $69,000. SIMPLE IRAs allow $16,000 in employee deferrals.
- Roth IRAs are the only type with no required minimum distributions, making them uniquely powerful for estate planning.
- You can contribute to both a workplace plan and a personal IRA in the same year — the limits are independent.
- IRA rollovers let you move 401(k) funds into an IRA when you change jobs, expanding your investment options while preserving tax-deferred status.
Frequently Asked Questions
How many IRAs can I have?
There is no limit to the number of IRA accounts you can hold. However, your total contributions across all traditional and Roth IRAs combined cannot exceed the annual limit ($7,000 in 2024). SEP-IRA and SIMPLE IRA limits are calculated separately.
See How Many IRAs Can You Have? for detailed scenarios.
Which IRA is best for a self-employed person?
A SEP-IRA is typically the best starting point for self-employed individuals — the contribution limit ($69,000 in 2024) dwarfs the standard IRA limit and setup is straightforward. Solo 401(k)s are the main alternative and can be better if you want to make Roth contributions or contribute more at lower income levels, since the SEP-IRA limits are tied to a percentage of income.
Can I contribute to an IRA if I have a 401(k) at work?
Yes. Having a 401(k) doesn’t prevent you from contributing to an IRA — it may affect whether your traditional IRA contributions are tax-deductible, depending on your income. Roth IRA contributions are never deductible regardless, so the deductibility question only applies to traditional IRAs.
What happens to my IRA when I die?
IRAs pass to named beneficiaries and bypass probate. A surviving spouse can treat the inherited IRA as their own — including rolling it into their own IRA. Non-spouse beneficiaries generally must withdraw all funds within 10 years under the SECURE 2.0 Act. Roth IRA beneficiaries receive distributions tax-free; traditional IRA beneficiaries pay income tax on withdrawals.
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