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IRAs Explained: Plan Your Financial Investments


An individual retirement account (IRA) is a tax-advantaged investment account designed to help people save for retirement. Depending on the type of IRA, your contributions can grow either tax-deferred or tax-free over time.

IRAs are especially useful for people who don't have access to a 401(k) or another employer-sponsored retirement plan, but anyone with earned income can open one. To start investing, you need to open an IRA through a financial institution such as a bank or an online brokerage as part of your investment planning. Some people also choose to work with a financial advisor, using financial advisor services as part of broader financial planning.

An IRA works by allowing you to contribute money each year, up to a limit set by the IRS, and invest that money into assets like stocks, bonds, mutual funds, or ETFs. The growth of your account depends on how much you contribute and how your investments perform over time. You can choose to manage your investments yourself or take a more hands-off approach by using a robo-advisor or financial planner as part of holistic financial planning.

There are several types of IRAs, including traditional and Roth IRAs for individuals, as well as SEP and SIMPLE IRAs for business owners and self-employed individuals. Although you can have multiple IRAs, the total amount you can contribute each year is capped by the IRS.

Because IRAs are meant for retirement, there are strict rules for withdrawals. If you take money out before age 59½, you may have to pay a 10% penalty along with income taxes, unless you qualify for an exception.

5 Common Types of IRAs:

  • A traditional IRA allows you to make contributions that may be tax-deductible in the year you contribute. This can lower your taxable income in the present. However, when you withdraw money in retirement, those withdrawals are taxed as regular income. Traditional IRAs also require you to start taking minimum distributions at a certain age.
  • A Roth IRA works differently. Contributions are not tax-deductible, but your money grows tax-free, and qualified withdrawals in retirement are also tax-free. This makes Roth IRAs appealing for people who expect taxes to be higher in the future or who want tax-free income later in life. However, there are income limits that may reduce or eliminate your ability to contribute.
  • A SEP IRA is typically used by self-employed individuals or small business owners. Contributions are tax-deductible, and investments grow tax-deferred until retirement. In 2026, contributions are limited to 25% of compensation or $72,000. Employers must contribute equally for eligible employees if they contribute for themselves.
  • A SIMPLE IRA is designed for small businesses with fewer than 100 employees. Contributions are tax-deductible, and investments grow tax-deferred. In 2026, employees can contribute up to $17,000, with an additional catch-up contribution of $4,000 for those age 50 or older. Some participants between ages 60 and 63 may qualify for higher limits under updated rules.
  • A rollover IRA is not a separate type of account but a process that allows you to transfer funds from an employer-sponsored plan, such as a 401(k), into an IRA. This is often done when changing jobs to keep retirement funds in one place.
    One of the biggest advantages of an IRA is its tax benefits. With a traditional IRA, you may receive a tax deduction when you contribute, but you'll pay taxes when you withdraw the money in retirement. With a Roth IRA, you don't get a tax break upfront, but your withdrawals are tax-free later.  Another major benefit is flexibility. IRAs usually offer a wider range of investment options compared to employer-sponsored plans. This allows you to build a portfolio that fits your financial goals and risk tolerance. This flexibility supports personalized investment planning within your broader financial planning. In many cases, a 401(k) alone may not provide enough savings for retirement, so an IRA can help increase your total retirement income.
    However, IRAs do have limitations. One downside is the relatively low contribution limit. In 2026, you can contribute up to $7,500 per year, or $8,600 if you are age 50 or older. This may not be enough to fully fund your retirement on its own. Additionally, higher-income earners may face restrictions on contributing to a Roth IRA.
    To open an IRA, you can go through an online broker or a robo-advisor. If you prefer to choose your own investments, an online broker may be the better option. If you want a more hands-off approach, a robo-advisor can automatically manage your investments based on your goals and risk level. Some investors also work with financial advisors, leveraging financial advisor services for more personalized planning.

IRA stands for "individual retirement arrangement," which is the official term used by the IRS, although most people refer to it as an individual retirement account. Regardless of the type, IRAs are designed to encourage long-term savings by offering tax advantages.

Many brokers and robo-advisors allow you to open an IRA with little to no minimum deposit. However, the tax benefits only begin once you start contributing money. While you can contribute up to the annual limit, you are not required to contribute the full amount, and you can invest at a pace that fits your budget.

It's also possible to have both a 401(k) and an IRA. A 401(k) typically allows higher contribution limits, especially if your employer offers matching contributions. However, an IRA may provide more investment options and lower fees, making it a valuable addition to your retirement strategy as part of comprehensive financial planning.

Like any investment account, an IRA does carry risk. Since your money is invested in assets like stocks and bonds, the value of your account can go up or down over time. As part of your investment planning, choosing the right investments is important to managing that risk and reaching your long-term financial goals.

Q&A


Question: What is an IRA and who can open one?

Answer: An individual retirement account (IRA)—officially “individual retirement arrangement”—is a tax-advantaged account to help you save for retirement. Anyone with earned income can open one, and IRAs are especially useful if you don’t have access to a 401(k) or similar employer plan. You open an IRA through a financial institution (bank, online broker, or robo-advisor), choose investments such as stocks, bonds, mutual funds, or ETFs, and your contributions grow tax-deferred or tax-free depending on the IRA type.

Question: How do traditional and Roth IRAs differ?

Answer: A traditional IRA may allow tax-deductible contributions today, but withdrawals in retirement are taxed as ordinary income, and you must begin taking required minimum distributions at a certain age. A Roth IRA has no upfront tax deduction; instead, your money grows tax-free and qualified withdrawals in retirement are tax-free. Roth IRAs also have income limits that can reduce or eliminate your ability to contribute, making them appealing for those who expect higher future tax rates or who want tax-free income later.

Question: How much can I contribute in 2026, and can I have multiple IRAs?

Answer: In 2026, you can contribute up to $7,500 per year to your IRAs, or $8,600 if you’re age 50 or older. You can hold multiple IRAs, but your total annual contributions across all of them cannot exceed these IRS caps. You’re not required to contribute the full amount; you can add money at a pace that fits your budget, and the tax benefits begin once you contribute.

Question: What IRAs are available for business owners and the self-employed?

Answer: Two common options are SEP and SIMPLE IRAs. A SEP IRA suits self-employed individuals and small business owners; contributions are tax-deductible and grow tax-deferred, with 2026 contributions limited to 25% of compensation or $72,000, and employer contributions must be proportional for eligible employees. A SIMPLE IRA is designed for small businesses with fewer than 100 employees; in 2026, employees can contribute up to $17,000, with a $4,000 catch-up for those age 50+, and some participants ages 60–63 may qualify for higher limits under updated rules.

Question: Can I use an IRA alongside a 401(k), and how do I get started? What about withdrawals and rollovers?

Answer: Yes. You can have both a 401(k) and an IRA, but you may or may not get a tax benefit on the IRA. Ask your advisor. A 401(k) often allows higher contributions and may include employer matching, while an IRA typically offers more investment choices and potentially lower fees—useful for broader financial planning. To start, open an IRA through your advisor. Because IRAs are for retirement, early withdrawals before age 59½ generally face a 10% penalty plus income taxes unless you qualify for an exception. If you change jobs, you can move money from a 401(k) into an IRA via a rollover to keep your retirement savings consolidated. As with any investment account, your IRA’s value can fluctuate with the market, so aligning investments with your goals and risk tolerance is key.