¹The following article is provided for educational purposes only and does not constitute personalized investment, tax, or legal advice. Any examples are hypothetical and for illustrative purposes only. Investing involves risk, and outcomes may differ materially from any projections or scenarios discussed. Readers should consult with a qualified financial, tax, or legal professional regarding their individual circumstances

According to the Investment Company Institute, 55.5 million U.S. households — 42.2% —owned an IRA in mid-2023. Yet many people still find the rules confusing—especially when it comes to taxes, contribution limits, and the differences between Traditional and Roth accounts. For some, the biggest misconception is that IRAs are only for the wealthy, when in reality they are among the most accessible retirement savings tools.

This article explains the essentials: what an IRA is, how it works, the types available, and what to consider before opening one.

Key Takeaways

• An IRA (Individual Retirement Account) allows individuals to save for retirement with specific tax advantages.
• Traditional IRAs provide tax deductions today but tax withdrawals later; Roth IRAs reverse the equation.
• Contribution limits apply annually and may be reduced for higher earners.
• Specialized IRAs exist for small business owners and self-employed individuals (SEP and SIMPLE IRAs).
• Rolling over an old 401(k) into an IRA can consolidate accounts and maintain tax status.

What Is an IRA?

An Individual Retirement Account (IRA) is a personal savings account with built-in tax benefits for retirement. Unlike workplace plans such as 401(k)s, an IRA is typically opened by an individual through a bank, brokerage, or financial institution.

Money contributed to an IRA can be invested in a wide range of assets—stocks, bonds, mutual funds, or ETFs—depending on the custodian. The real advantage is in the tax treatment: either deferring taxes until retirement (Traditional) or avoiding taxes on qualified withdrawals later (Roth).

Traditional vs. Roth IRAs

The two most common IRA types differ mainly in how and when taxes are applied.

• Traditional IRA: Contributions may be tax-deductible in the year they’re made, but withdrawals in retirement are taxed as income. Required minimum distributions (RMDs) begin at age 73 under current law.
• Roth IRA: Contributions are made with after-tax dollars, meaning no deduction upfront. However, qualified withdrawals in retirement are tax-free, and there are no RMDs during the owner’s lifetime.

So what? The choice between Traditional and Roth often depends on whether a person expects to be in a higher or lower tax bracket in retirement.

Contribution Rules and Limits

For 2025, the contribution limit for IRAs is $7,000 per year (or $8,000 for those age 50 and older through a “catch-up” contribution).

• Traditional IRA deductions may be limited for individuals with workplace retirement plans, depending on income.
• Roth IRA eligibility phases out at higher income levels, with contributions restricted once adjusted gross income exceeds IRS thresholds.

These rules mean that not everyone can use both IRA types in the same way, making it important to understand eligibility.

Other IRA Types: SEP and SIMPLE

Not all IRAs are individual-focused. For business owners and self-employed professionals, there are specialized accounts:

• SEP IRA: Simplified Employee Pension plans allow higher contribution limits, tied to a percentage of income. They are often used by freelancers and small business owners.
• SIMPLE IRA: Designed for small businesses with fewer than 100 employees, these accounts allow both employer and employee contributions but with simpler administration than a 401(k).

These structures extend retirement savings opportunities to people outside traditional corporate jobs.

Rolling Over a 401(k) into an IRA

When employees leave a job, they often face the question of what to do with an old 401(k). Rolling it into an IRA is one option.

Benefits of a rollover may include:

• Consolidating accounts for easier management.
• Accessing broader investment options beyond a 401(k) menu.
• Preserving tax-deferred status when done as a direct transfer.

Hypothetical: An employee with a $50,000 401(k) balance changes jobs. By rolling the balance into an IRA, they maintain the tax-advantaged status of those funds while gaining access to more investment choices.

IRAs may seem complicated, but their purpose is straightforward: to give individuals more control over retirement savings while leveraging tax benefits. Understanding the differences between Traditional and Roth accounts—and knowing when to consider SEP, SIMPLE, or rollovers—helps make the most of one of the most flexible retirement tools available.