An individual retirement account (IRA) is a US savings account with special tax treatment, opened by an individual rather than through an employer, to build money for retirement. The law calls it an individual retirement arrangement. Money inside the account can be invested in stocks, bonds, mutual funds, exchange traded funds (ETFs) and certificates of deposit, and grows without yearly tax on interest, dividends or gains.
IRAs sit beside workplace plans such as the 401(k) and beside Social Security as one of the three main sources of US retirement income. They were created by the Employee Retirement Income Security Act of 1974 (ERISA), and the Roth version was added by the Taxpayer Relief Act of 1997, named after Senator William Roth. The Internal Revenue Service (IRS) sets the rules and the yearly limits; the account itself is held by a bank, broker or fund company acting as trustee or custodian.
Individual retirement account in plain terms
Think of an IRA as a jar with a special lid that the tax collector agrees not to open while the money is growing. You choose, once, when the tax is taken. With a traditional jar you put money in before tax and pay tax when you take it out years later. With a Roth jar you pay tax on the money first, then everything that comes out in retirement, including the growth, is free of tax.
In return for this deal, the jar has rules: only so much can go in each year, and taking money out early usually costs an extra charge. The jar is the wrapper; what you put inside it, such as funds or bonds, is a separate choice.
Traditional and Roth IRAs compared
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | Often tax-deductible | Made with after-tax money |
| Growth | Tax-deferred | Tax-free if rules are met |
| Withdrawals in retirement | Taxed as ordinary income | Qualified withdrawals tax-free |
| Income limit to contribute | None (deduction may be limited) | Phases out at higher incomes |
| Required minimum distributions | Yes | None for the original owner |
Choosing between them is largely a bet on tax rates: a traditional IRA suits someone who expects a lower rate in retirement, a Roth someone who expects a higher one or wants tax-exempt income later. Employer-linked variants include the SEP IRA and SIMPLE IRA for small businesses and the self-employed.
Contribution limits for 2026
For 2026 the IRS limit on total contributions to all of a person's traditional and Roth IRAs is $7,500, up from $7,000 in 2025, plus a catch-up of $1,100 for people aged 50 or over (indexed to inflation since the SECURE 2.0 Act of 2022). Contributions cannot exceed earned income, though a working spouse can fund an IRA for a non-working spouse. Older glossaries quote limits such as $2,000 or $3,000: $2,000 applied from 1982 to 2001 and $3,000 only from 2002 to 2004, so those figures are long out of date.
Roth eligibility phases out between $153,000 and $168,000 of modified adjusted gross income for single filers in 2026. The deduction for traditional contributions is also phased out for people covered by a workplace plan, for example between $129,000 and $149,000 for a married couple filing jointly when the contributing spouse is covered. Contributions for a year can usually be made until the tax filing deadline the following April. Because the limits rise over time with inflation, the IRS publishes new figures each autumn.
Withdrawals and required minimum distributions
Withdrawals before age 59½ generally face a 10% additional tax on top of normal income tax, with exceptions such as disability, certain education costs and up to $10,000 for a first home. Roth contributions (but not earnings) can be taken out at any time; earnings are tax-free once the account has been open five years and the owner is 59½ or meets another condition.
Traditional IRA owners must start required minimum distributions (RMDs). The SECURE Act of 2019 raised the starting age from 70½ to 72, and SECURE 2.0 raised it to 73 from 2023 and will raise it to 75 from 2033. The same 2019 law removed the age cap on contributing to a traditional IRA. Missed RMDs carry an excise tax, reduced by SECURE 2.0 to 25%, or 10% if corrected promptly.
IRAs in a wider plan and abroad
An IRA is a wrapper, so the usual investing decisions still apply inside it: asset allocation, risk tolerance and a long-term investment strategy. Because gains are sheltered, decades of compound interest work on the full balance, which is why regular monthly contributions, similar to a systematic investment plan, are common. People pursuing FIRE use "Roth conversion ladders" to reach savings before 59½, and money in an employer plan or pension fund can often be rolled into an IRA when changing jobs.
A traditional IRA's deduction also lowers income for the alternative minimum tax. Other countries use similar wrappers: the United Kingdom's Individual Savings Account (ISA, with a £20,000 annual allowance) and Self-Invested Personal Pension, and Canada's RRSP and TFSA. A US citizen abroad may find a foreign wrapper is not tax-favoured in the US, so tax residency matters. Unlike a savings account, an IRA invested in securities is not covered by deposit insurance unless it holds bank deposits.