What is IRA?

An Individual Retirement Account (IRA) is a personal, tax-advantaged savings vehicle designed to help individuals build wealth for retirement independently of, or in addition to, employer-sponsored plans. Established under Section 408 of the Internal Revenue Code, IRAs offer powerful tax incentives to encourage disciplined, long-term saving. The two most common types are the Traditional IRA (which generally permits pre-tax contributions that reduce current-year taxable income, with taxes deferred until retirement distributions are taken) and the <a href="/calculators/ira" class="text-emerald-600 dark:text-emerald-400 hover:text-emerald-700 dark:hover:text-emerald-300 hover:underline font-semibold transition-colors duration-200">Roth IRA</a>, which is funded with after-tax dollars and offers tax-free growth and tax-free qualified withdrawals in retirement.

For the 2026 tax year, the IRS limits combined annual contributions to all of an individual's traditional and Roth IRAs to $7,500 ($7,000 in 2025) for those under age 50. Individuals aged 50 and older are eligible to make an additional catch-up contribution of $1,100 in 2026 ($1,000 in 2025), bringing their total annual limit to $8,600. To contribute to an IRA, the individual must have earned income (such as wages, salary, or self-employment income) for the corresponding tax year, and the total annual contribution cannot exceed their earned income. While anyone with earned income can contribute to a Traditional IRA, the tax deductibility of those contributions phases out at higher income levels if the individual or their spouse is covered by an active workplace retirement plan. Roth IRA contributions are also subject to strict income phase-out thresholds.

Compared to employer-sponsored plans like 401(k)s, which typically offer a limited selection of funds, IRAs provide savers with a vast investment universe. Within an IRA, investors can buy and sell individual stocks, bonds, exchange-traded funds (ETFs), mutual funds, and real estate investment trusts (REITs). Because IRAs are dedicated retirement vehicles, withdrawals made prior to age 59½ are generally subject to a 10% early withdrawal penalty in addition to ordinary income tax. However, the IRS permits certain penalty-free exceptions, such as withdrawals for a first-time home purchase (up to a $10,000 lifetime limit), qualified higher education expenses, or major unreimbursed medical bills. Upon the owner's death, IRA assets pass to designated beneficiaries subject to IRS distribution guidelines, which require most non-spouse beneficiaries to fully distribute the account within ten years under the SECURE Act of 2019.