What is an IRA?
Summary
An Individual Retirement Account (IRA) is a tax-advantaged account designed to help you save and invest for retirement. Anyone with earned income—whether full-time, part-time, or self-employed—can contribute to a traditional IRA. Inside the account, your money can be invested in stocks, bonds, funds, and other assets, where it grows with favorable tax treatment.
The two most common types are the traditional IRA and the Roth IRA, and the core difference comes down to whenyou pay taxes. With a traditional IRA, contributions may give you a tax deduction the year you make them, but you’ll owe taxes on your withdrawals in retirement. With a Roth IRA, you contribute money that’s already been taxed, so you’re able to withdraw your money tax-free once you’re at least age 59½ and have had the account for at least five years.
For 2026, the maximum annual contribution for both traditional and Roth IRAs is $7,500 for individuals under 50, and $8,600 for those 50 or older. Roth IRAs add an income ceiling that traditional IRAs don’t have, and pulling money out early generally triggers a penalty. Which one fits you depends largely on your income and your tax outlook.
Details
What an IRA Actually Is
An IRA is not an investment itself—it’s a container that holds investments and shields them from certain taxes. Think of it as a special basket: you put money in, choose what to invest in (stocks, bonds, mutual funds, ETFs), and the government agrees not to tax that money the way it taxes an ordinary brokerage account. The trade-off is that the money is meant to stay put until retirement. Anyone contributing must have earned income, and you cannot contribute more than your taxable compensation for the year. IRAs are especially useful for people whose jobs don’t offer a 401(k), or for those who already have a workplace plan but want to set aside even more.
Traditional IRA: Pay Taxes Later
A traditional IRA is “tax-deferred,” which is a fancy way of saying you postpone the tax bill. Contributions to traditional IRAs give you a tax deduction the year you make them, but you’ll owe taxes on your withdrawals in retirement. So if you put in $5,000 this year, you may be able to subtract that from your taxable income now—lowering this year’s tax bill—and instead pay ordinary income tax on the money decades later when you take it out. There’s no income cap on contributing to a traditional IRA, but there is a catch on the deduction: the deductibility of contributions depends on whether you (or your spouse) are covered by a workplace retirement plan and your modified adjusted gross income (MAGI). Higher earners with a workplace plan may find their deduction reduced or eliminated, even though they can still contribute.
Roth IRA: Pay Taxes Now
A Roth IRA flips the timing. You contribute money that’s already been taxed, so there’s no upfront deduction—but the payoff comes later. Roth IRAs allow after-tax contributions only, but you’re able to withdraw your money tax-free once you’re at least age 59½ and have had the account for at least five years. Every dollar of growth comes out untaxed, which can be enormously valuable if your investments do well or if you expect to be in a higher tax bracket in retirement. Roth IRAs carry one significant restriction traditional IRAs don’t: an income limit. For 2026, you can contribute to a Roth IRA only if your modified adjusted gross income is under $153,000 if you file as a single person or $242,000 if you file jointly; above those thresholds your allowance phases down and eventually disappears. Roth IRAs also don’t force you to start withdrawing money at a set age during your lifetime, unlike traditional IRAs.
The Backdoor Roth and Income Limits
Because Roth IRAs are so attractive, many high earners who are technically locked out use a legal workaround. For those who can’t contribute directly, the backdoor Roth IRA strategy involves putting already-taxed money into a traditional IRA (which has no income limit) and then converting that account to a Roth shortly afterward, before the money has time to generate taxable gains. It’s a popular tactic, but it has technical traps—particularly the IRS “pro-rata rule,” which can create an unexpected tax bill if you hold other pre-tax IRA money. The IRS treats all your IRA balances—including SEP and SIMPLE IRAs—as one total bucket for these calculations, so it’s wise to consult a tax professional before attempting it.
Other IRA Types for the Self-Employed
Beyond traditional and Roth, two IRA types serve small-business owners and the self-employed, and they allow much larger contributions. With a SEP IRA, for 2026, contributions are limited to the lesser of 25% of employee compensation or $72,000. SEP contributions come from the employer rather than the individual. SIMPLE IRAs let employees contribute directly while requiring the employer to chip in too; the standard 2026 employee limit moved to $17,000, with certain small employers allowed a higher ceiling.
Limits and Penalties to Keep in Mind
A crucial point that trips up many savers: the annual limit is a combined cap across all your traditional and Roth IRAs—not per account. You cannot contribute $7,500 to a traditional IRA and another $7,500 to a Roth IRA; the annual limit is the total across all IRAs in your name. Exceeding it carries consequences—if you don’t catch excess contributions by when you file taxes, you may have to pay a 6% penalty on those contributions each year until they are removed. And because these accounts are built for retirement, withdrawing early generally costs you: pulling money out before age 59½ typically triggers a 10% penalty on top of any taxes owed, though the IRS allows certain exceptions for things like a first home purchase, education, or specific hardships.
