Retirement Accounts
You may already have access to retirement savings options if you have an employer. But if you don’t have those options or simply want to save independently, an individual retirement account (IRA) can help you prepare for your golden years. Both traditional and Roth IRAs offer several advantages. Let's dive into everything you need to know including tax advantages, contribution limits, and withdrawal rules in our comprehensive guide.
R. Tyler End, CFP®
Published February 6th, 2025
R. Tyler End, CFP®
•
Published February 6th, 2025
Table of Contents
Key Takeaways
IRAs come in two forms: Roth and Traditional, with the primary difference being how each account is taxed.
You don’t need an employer retirement plan to set up an IRA and begin contributing money toward retirement.
IRAs come with contribution limits and, with Roth IRAs, you can’t participate if your income exceeds a certain amount during the tax year.
You may already have access to retirement savings options if you have an employer. But if you don’t have those options or simply want to do something on your own, an individual retirement account (IRA) can help you save for your golden years. Both traditional and Roth IRAs offer several advantages.
But when you’re asking, “What is an IRA?” There are some differences between 401(k)s and IRAs. Most notable is the contribution limit, which is significantly lower than what’s allowed with a 401(k). However, there are also significant differences between the two types of IRAs. Before you search for an IRA, it’s important to know what to expect.
What is an IRA?
An IRA—short for Individual Retirement Account—is a retirement savings account that can help you invest for retirement and save money on taxes in the short term. An IRA is one way to diversify your retirement portfolio or to contribute more to your retirement savings when you have maxed out your 401(k) contributions for the year.
Anyone with earned income can open and contribute to an IRA, making them popular with people who do not have employer-sponsored retirement plans, such as 401(k) accounts. IRAs also offer an extensive range of financial products to invest in, including stocks, bonds, exchange-traded funds (EFTs), and mutual funds.
There are different types of IRAs, each with rules regarding contributions, withdrawals, eligibility, and taxes.
Types of IRAs
Learn about the different IRAs, their tax implications, contribution limits, and more to decide which is best for you.
Traditional IRA
A traditional IRA is a tax-deferred retirement savings vehicle. If you contribute $3,000 to your IRA, your taxable income will be $3,000 less. However, you must pay income taxes on your withdrawals once you retire.
The IRA only assesses capital gains or dividend income taxes once account owners withdraw. Contributions to IRA accounts are made with qualified earned compensation; in other words, you make contributions from income earned from work, whether W-2 earnings, wages, salaries, tips, professional fees, or bonuses.
IRAs are opened via a broker—including online brokers and robo-advisors—or through a financial advisor.
Withdrawals
Technically, you can withdraw from your traditional IRA account anytime—but you might not want to. That’s because if you take a distribution early—before you turn 59 ½—you will be taxed at ordinary income tax rates and have to pay a 10% early withdrawal penalty. There are a few exceptions that can get you out of the penalty, such as:
- Death or permanent disability: If you become permanently disabled, you can tap into your IRA without penalty. If you die, your beneficiary can withdraw funds with a penalty.
- Home purchase: You can use up to $10,000 of your IRA to help pay for your first home purchase.
- Higher education: Some higher education expenses can be covered with funds from an IRA. Tuition, fees, books, and supplies are all eligible expenses.
- Rollover: If you wish to roll over your IRA funds to another IRA or retirement plan, you must deposit the withdrawn money within 60 days to avoid the penalty.
Contribution Limits
In 2025, the maximum annual individual contribution to a traditional IRA is $7,000. If you are 50 or older, you can contribute an additional $1,000.
When you have a traditional IRA and an employer-sponsored retirement plan (such as a 401(k)), the IRA might limit how much of your traditional IRA you can deduct from your taxes. You can only take the full deduction on a traditional IRA if your modified adjusted gross income (MAGI) was $73,000 or less last year; in 2025, the amount increases to $77,000. Married taxpayers filing jointly have limits of $116,000 (or less) last year or $123,000 in 2025.
Roth IRA
A Roth IRA is a retirement account in which you contribute after-tax dollars. If you expect to be a higher earner during retirement, a Roth IRA allows you to pay taxes now to enjoy withdrawals tax-free later, when you might get placed into a higher income bracket.
Withdrawals
You can withdraw contributions from your Roth IRA at any time and not pay taxes or penalties, so long as you only withdraw contributions and not earnings. For you to withdraw any returns on the investment, they must be classified as qualified distributions.
To count as a qualified distribution, at least one of these conditions must be met:
- The withdrawal must occur at least five years after the account was opened
- The account holder is at least 59 ½ when the distribution occurs
- The distributed funds are used towards purchasing or building a first home for the account holder or qualified family member, with a cap of $10,000 for the withdrawal per lifetime
- The distribution occurs after the account owner becomes disabled
- The account is distributed to the beneficiary after the account holder’s death
Earnings withdrawn that are not considered qualified distributions are subject to taxes and a 10% penalty. Roth IRA accounts are the only ones not subject to RMD (required minimum distribution) rules; account holders can keep them open for their entire lives and not take any distributions. However, the beneficiary of the account must take RMDs.
Contribution Limits
In 2025, the Roth IRA contribution limit will be the same as a traditional IRA: $7,000 for those under 50 and an additional $1,000 catch-up contribution for those 50 and older.
These limits assume your modified adjusted gross income is under a certain amount. In 2025, you must make less than $146,000 (for single filers) or $230,000 (for joint filers) to contribute the maximum amount.
SEP IRA and SIMPLE IRA
In addition to traditional IRAs and Roth IRAs, there are two other types of IRA accounts to be aware of: the SEP IRA and SIMPLE IRA. Small business owners typically use these retirement plans, as they have lower operating costs and administrative fees than other IRAs.
What is a SIMPLE IRA?
SIMPLE IRA is a shortened way to discuss the Savings Incentive Match Plan for Employees' Individual Retirement Accounts. These accounts function similarly to traditional IRAs but have higher contribution limits and are usually used by self-employed people with fewer than 100 employees.
Like a traditional IRA, a SIMPLE IRA allows eligible employees to make pre-tax contributions; the employer can also contribute to the employee’s plan. Employees, however, cannot opt out of a SIMPLE IRA managed by their workplace so long as they are eligible for it. One can choose not to make contributions, but the account must remain open and allow employer contributions.
Contribution Limits
In 2025, the annual contribution limit for SIMPLE IRAs is $16,000 for those under 50. If you are 50 or older, you can make additional catch-up contributions up to $3,500, for $19,500. Contributions are made pre-tax, which can lower your taxable income for the year.
SIMPLE IRAs require employers to contribute to their employees’ accounts, but employers can choose between elective and nonelective contributions. Elective contributions are dollar-for-dollar matches, up to 3% of the employee’s salary. Employers can occasionally decide to contribute less than 3%, but they are not allowed to drop the percentage below 1%, and it cannot drop below 3% for two out of five years.
Withdrawals
Like other IRAs, withdrawals taken before age 59 ½—unless they qualify for an exception—will be subject to a 10% penalty on top of standard income tax. In addition, if you take money out of the account within the first two years of owning it, you will be subject to a 25% withdrawal penalty.
What is a SEP IRA?
SEP IRA stands for “simplified employee pension.” These plans are popular with self-employed people who own businesses or earn freelance income. SEP IRAs are available for small businesses of all kinds, including sole proprietorships, partnerships, limited liability companies, S corporations, and C corporations.
To be eligible for a SEP IRA, the IRS states that employees must be at least 21 years old, have worked at the company for three of the past five years, and have earned at least $750 from the employer in 2025.
Contribution Limits
In 2025, a self-employed business owner can contribute up to $69,000 per year to a SEP IRA, but no more than 25% of their compensation. This is significantly more than the limit set for traditional IRAs. Still, there’s a catch: contribution rates must be the same for all company employees with a SEP IRA plan, including the owner. So, while SEP IRA plans are a way to save more money for retirement than a traditional plan offers, business owners must also contribute the same rate to all eligible employees.
As with traditional IRA accounts, the contributions are tax-deductible.
Withdrawals
Account owners can withdraw funds at any time without having to show financial hardship. However, withdrawals taken before you turn 59 ½ are considered early distributions and will be subject to a 10% tax penalty and any income tax. As with traditional and Roth IRAs, some exceptions allow the penalty to be waived, such as permanent disability, first-time home buyers, qualified higher education expenses, or an IRA tax levy.
Benefits of an IRA
There are many reasons to consider opening an IRA as you plan for retirement.
Tax Advantages
With a traditional, tax-deferred IRA, you will make contributions now and only pay taxes on them once you begin to take withdrawals during retirement (or when you are forced to take required minimum distributions at age 73)—this can reduce your taxable income for the year and save you money. On the flip side, if you think you will be in a higher income bracket during retirement, you can open a Roth IRA to pay taxes and not pay them later on when you withdraw. Discuss your goals and situation with a Certified Financial Planner to choose the right IRAs.
Easy to Open and Set Up
IRA accounts are easy to open, set up, and access; many people now open one online through a bank or brokerage firm. You can manage your investments independently or work with a financial planner to strategize based on your risk tolerance, available funds, and other factors.
More Control than a 401(k)
Many people prefer IRAs because they aren’t tied to employers. With 401(k) accounts, your employer can often change the plan or the investments without your input, as they are the plan's owner, not you. In addition, 401(k) accounts can be a pain to deal with when you leave your job; you’ll need to roll the funds into a new account or leave the funds where they are, forcing you to track all your past 401(k) accounts when planning for retirement. Your IRA, on the other hand, is yours to control and isn’t attached to your employer. In addition, many IRA accounts offer more robust investment options than 401(k)s do.
IRA vs. 401(k)
IRAs and 401(k) accounts are both excellent retirement savings tools, but there might be reasons why you choose to contribute to one over the other. Let’s look at all the options side-by-side.
Retirement Account Comparison
| Account Type | 401(k) | Traditional IRA | Roth IRA | SEP IRA | SIMPLE IRA |
|---|---|---|---|---|---|
| Annual Contribution Limit | $23,000 in 2025 ($30,500 for those age 50 or older). | In 2025: $7,000 for those under age 50 and $8,000 for those age 50 or older. | In 2025: $7,000 for those under age 50 and $8,000 for those age 50 or older. | Cannot exceed the lesser of 25% of the employee's compensation, or $69,000 for 2025. | In 2025: $16,000 ($19,500 for those age 50 or older). |
| Employer Match | Commonly offered; usually 3–5% | N/A | N/A | Up to 3% allowed | Up to 3% allowed |
| Tax Considerations | Tax-deferred withdrawals are taxed as income unless you have a Roth 401(k). | Contributions reduce taxable income in the year they are made, and distributions in retirement are taxed as ordinary income. | Taxes are paid on contributions, but withdrawals are tax-free. | Contributions reduce taxable income in the year they are made, and distributions in retirement are taxed as ordinary income. | Contributions reduce taxable income in the year they are made, and distributions in retirement are taxed as ordinary income. |
| Eligibility | Open to anyone who is offered an employer-sponsored plan | To make contributions, your modified adjusted gross income must be lower than $161,000 for single filers or lower than $240,000 for those married filing jointly. | Eligible participants are 21 or older employees, have worked at the company for at least three of the past five years, and have made a minimum of $750 in 2025. | Employees who received at least $5,000 in compensation during any two preceding calendar years (consecutive or not) and are expected to receive at least $5,000 in compensation during the calendar year. | |
| Required Minimum Distributions (RMDs) | Begin at 72 (73 if you reach 72 after Dec. 31, 2022). | Begin at 72 (73 if you reach 72 after Dec. 31, 2022). | No RMDs are required during the account owner’s lifetime; beneficiaries may be required to take distributions. | Begin at 72 (73 if you reach 72 after Dec. 31, 2022). | Begin at 72 (73 if you reach 72 after Dec. 31, 2022). |
| Investment Options | No control over plan, administrative fees, and investment costs. Limited investment selection. | Extensive investment selection. | Extensive investment selection. | Extensive investment selection. | Extensive investment selection. |
How to Open an IRA
Opening an IRA is relatively straightforward. Most accounts are opened online, and very little paperwork is required.
1. Choose a Broker or RoboAdvisor
Before opening your IRA, you should choose your broker. Many companies offer IRAs, including Charles Schwab, Vanguard, JPMorgan Chase, Retirable, and more. You will select and manage your own investments with some of these options. You can also open an account with a RoboAdvisor, which will use data via an algorithm to make investments on your behalf. Companies with RoboAdvisor tools include Wealthfront, Betterment, and Schwab Intelligent Portfolios.
2. Choose Your IRA Type
Now that you’ve reviewed the various IRAs available, you should choose one that makes sense for your financial situation.
3. Open Your Account
You’ll need essential documentation to prove your identity, address, and other basic information. Usually, the information you’ll need includes:
- Full name, address, and telephone number
- Social Security number
- Driver’s license number
- Date of birth
- Beneficiary information
- Employer information
- Investment choices and risk tolerance
4. Fund Your Account
As a last step, you will link your bank to the broker’s account to add funds to your IRA. You should be able to make one-time transfers or recurring auto-transfers from your bank.
Protect yourself from scams and fraud.
Every Retirable client is protected with $1M in identity theft insurance.Required Minimum Distributions (RMDs)
Required minimum distributions—or RMDs for short—are the minimum amount you must withdraw from your retirement account each year after you reach a certain age (for most people, that age is 73). The IRS determines the amount and age.
Unless your withdrawals come from a Roth account, they will be taxed as income if you miss an RMD.
You must begin taking RMDs from your traditional IRA by April 1 of the year after you turn 73, as of January 1, 2023. You must take these withdrawals regardless of your financial situation—in other words, whether you need the funds.
Roth IRAs differ from traditional IRAs as they are not subject to RMDs. If you own a Roth IRA, you do not have to take RMDs from it during your lifetime. That said, your beneficiaries (except a surviving spouse) must take RMDs from your account after they inherit it.
Frequently Asked Questions
You asked. We answered.
How can I start an IRA, and which should I choose?
Any major brokerage can open an IRA for you so long as you provide the proper documentation and funds to open the account. When deciding what type of IRA to open, you must choose between a self-managed account and a RoboAdvisor-run account. Because each IRA has many pros and cons, it’s best to discuss the options with a Certified Financial Planner and choose the account best for your goals, financial situation, risk tolerance, and tax considerations.
How can I withdraw from an IRA?
You can withdraw from your IRA at any time, but if you take distributions before you turn 59 ½, you might need to pay a 10% tax penalty on top of the ordinary income tax on the withdrawn amount. However, there are a few exceptions to this; for instance, the IRS allows penalty-free withdrawals if they are used for certain higher education expenses, a first-time home purchase, or if the account owner becomes permanently disabled.
Can I have multiple IRAs?
Yes, you can have multiple IRAs. There is no limit to the number of accounts you can have, but you can contribute up to the annual contribution limit across all your accounts in a given year. The contribution limit for 2025 is $7,000 for those under 50, so you could contribute $3,500 to each if you have two IRA accounts.
What happens to my IRA if I change jobs?
With an IRA that you have opened yourself and is not tied to your employer (i.e., not a SIMPLE or SEP IRA), nothing happens if you change jobs. The IRA is not linked to your employer; you are the account holder and manager.
How are IRAs taxed?
The answer depends on which type of IRA you have. With a traditional IRA, income taxes will be due when you take distributions; the amount you pay will depend on your overall income tax bracket. With Roth IRAs, you will pay taxes on your contributions rather than distributions; this can be advantageous if you believe you will be in a higher income bracket during retirement.
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Tyler is a Certified Financial Planner® and CEO & Co-Founder at Retirable, the retirement peace of mind platform. Tyler has nearly 15 years of experience at leading companies in the wealth management and insurance industries. Before Retirable, Tyler worked as Head of Operations Expansion at PolicyGenius, expanding the company’s reach into new products — turning PolicyGenius into an industry-leading disability and P&C insurance distributor. Before working at PolicyGenius, Tyler worked as Wealth Management Advisor at prominent financial services organizations.
As an advisor, Tyler played an integral role in helping clients define goals, achieve financial independence and retire with peace of mind. Through this work, Tyler has helped hundreds of thousands of people get the financial planning and insurance advice they need to succeed. Since founding Retirable, Tyler’s innovative approach to retirement planning has been featured in publications such as Forbes, Fortune, U.S. News & World Report, and more.
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Share this advice
Tyler is a Certified Financial Planner® and CEO & Co-Founder at Retirable, the retirement peace of mind platform. Tyler has nearly 15 years of experience at leading companies in the wealth management and insurance industries. Before Retirable, Tyler worked as Head of Operations Expansion at PolicyGenius, expanding the company’s reach into new products — turning PolicyGenius into an industry-leading disability and P&C insurance distributor. Before working at PolicyGenius, Tyler worked as Wealth Management Advisor at prominent financial services organizations.
As an advisor, Tyler played an integral role in helping clients define goals, achieve financial independence and retire with peace of mind. Through this work, Tyler has helped hundreds of thousands of people get the financial planning and insurance advice they need to succeed. Since founding Retirable, Tyler’s innovative approach to retirement planning has been featured in publications such as Forbes, Fortune, U.S. News & World Report, and more.
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