- Investing
- Retirement Planning
Individual retirement accounts (IRAs) help you save money for retirement when you’re employed. They offer tax advantages so you can put away more money for your future. From contribution limits and tax deductions to rollovers and conversions, here’s what to know about both Roth and traditional IRAs.
- Roth Individual Retirement Accounts (Roth IRAs)
Everything You Need To Know About IRAs
Traditional IRA vs. Roth IRA: What’s the Difference?Frequently Asked Questions
What are individual retirement accounts (IRAs)?
Individual retirement accounts (IRAs) are retirement savings accounts that individuals who are employed use to save and invest. Different types of IRAs offer different tax advantages. Money in an IRA is invested, which allows it to potentially grow in value over time.
Learn MoreWhat an IRA Is for and How It Works
When did individual retirement accounts begin?
Individual retirement accounts (IRAs) were first introduced in 1974 via the Employee Retirement Income Security Act (ERISA). They were at first only offered to workers who did not have pensions, but in 1981, the government made them eligible for all workers and spouses.
Learn MoreUnderstanding Individual Retirement Accounts (IRAs)
What are the different types of individual retirement accounts?
There are several different types of individual retirement accounts (IRAs), including traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and rollover IRAs. All have different tax advantages that benefit different people based on their work situations.
Learn MorePopular Types of IRAs To Consider for Your Portfolio
Who is eligible for an individual retirement account?
You’re eligible for an individual retirement account (IRA) if you have what the IRS determines as “earned income”—wages, salary, tips, commissions, self-employment income, or non-taxable combat pay. If you do not have earned income but are married to someone who does, you may be eligible for an IRA. Even if you have an employer-sponsored retirement account, you can have an IRA.
Learn MoreIRA Limits on Contributions and Income
How are IRAs taxed?
Investment income earned in both a traditional and Roth IRA grows tax-free. Your withdrawals from a traditional IRA are taxed in retirement, but the contribution amounts can be deducted, lowering your taxable income in the year you made the contribution. The amount of tax owed on withdrawals in retirement depends on your tax bracket and any tax deductions you claimed. The money contributed to a Roth IRA is made with after-tax dollars (no tax deduction), but you don't pay taxes on distributions or withdrawals in retirement.
Learn MoreWill Opening an IRA Help You Save Money on Taxes?
How many IRAs can you have?
You can have multiple IRAs—there is no limit. You can have more than one traditional or Roth IRA or a mix of both. However, the contribution limit for the year applies to all of your IRAs, not each one individually. So if you have two IRAs, you can still only contribute up to the maximum amount for that tax year.
Learn MoreCan You Have a Traditional and a Roth IRA?
How do inherited IRAs work?
If you inherit an IRA from your spouse, you can become the account owner of the IRA, roll it over into another IRA you own, or act as a beneficiary and make a plan to take distributions. If you inherit an IRA from someone else, you will have to make a plan to take distributions. Inherited Roth IRAs generally need to be distributed. They can be treated as your own only if you’re the spouse of the deceased.
Learn MoreWhat To Do With an Inherited IRA or 401(k)?
How do you open an IRA?
You can open an IRA at any time. Banks and brokerage firms often offer IRAs, so look around to find an institution you trust. You can open a new IRA with money that you roll over from an existing retirement account, or you can start it with money that you transfer from your checking or savings account. When choosing an IRA, consider minimum balance requirements, account costs or fees, and more.
Learn MoreHow To Open an IRA at Your Bank
Key Terms
Roth IRA
A Roth IRA is a double-tax-advantaged retirement savings account that offers tax-free earnings growth and tax-free distributions. Given these tax perks, opening a Roth IRA is a smart way to invest and grow your money, so that you may become financially independent by the time you retire.
SIMPLE IRA
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is an employer-sponsored retirement plan offered within small businesses that have 100 or fewer employees.
72(t) Payments
The Substantially Equal Periodic Payment rule allows you to take money out of an IRA before the age of 59 1/2. It also lets you avoid the 10% penalty tax. This approach is also called 72(t) payments because the rule falls under IRS code section 72(t). These payments are also called SEPP payments.
Spousal IRA
To contribute to an individual retirement account (IRA), you need to have earned income. If you have a spouse who doesn't work, they can also open and contribute to an IRA since you have earned income. This is known as a "spousal IRA," and it's a great way for couples to save for the future.
Roth Conversion
A Roth conversion is an optional decision to change part or all of an existing tax-deferred retirement plan, such as a 401(k) or a traditional IRA, to a Roth IRA. Converting makes sense if you believe that the benefit from your money growing tax-free will be greater than the immediate cost of paying the taxes due at the time of the conversion.
IRA
IRA stands for "individual retirement account." Tax law provides for many types of IRAs, each designed to help you save for retirement and taxed in its own way. IRAs differ from employer-sponsored accounts in that you can invest on your own terms in many cases instead of having to choose between a few select funds, as you would with a 401(k).
IRA Rollover
An IRA rollover is when you transfer or “roll over" money from a previous employer's retirement plan. A rollover IRA is subject to the same terms as other retirement accounts (for instance, with certain exceptions, you can’t make a withdrawal before the age of 59 ½ without paying a penalty), but in other ways, it is far more flexible.
SEP IRA
A SEP IRA (Simplified Employee Pension) allows employers to make retirement-plan contributions for their employees. In addition, self-employed individuals may create and fund a SEP IRA retirement plan for themselves.
Early Distribution Penalty
An IRA early distribution or withdrawal penalty is when you take money out of your IRA before you reach age 59 ½.
Required Minimum Distributions (RMDs)
The IRS requires you begin taking withdrawals from your qualified retirement accounts when you reach age 72. These withdrawals are referred to as required minimum distributions (RMDs). Accounts affected by this rule include traditional IRAs, 401(k)s, 457 plans, and other tax-deferred retirement savings plans such as TSPs, 403(b)s, TSAs, SEP IRAs, and SIMPLE IRAs.
Modified Adjusted Gross Income (MAGI)
Your modified adjusted gross income (MAGI) determines whether you are allowed to claim certain benefits on your taxes. These include whether you can deduct contributions to an individual retirement account (IRA). It also impacts what you can put in a Roth IRA each tax year.
