Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs) help you save money for retirement when you’re employed. They offer tax advantages so you can put more money away for your future. From contribution limits and tax deductions to rollovers and conversions, here’s what to know about both Roth and traditional IRAs.

Everything You Need To Know About IRAs

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Frequently Asked Questions
  • What are individual retirement accounts (IRAs)?

    Individual retirement accounts (IRAs) are retirement savings accounts that individuals who are employed can use to save and invest more money for their future. Different types of IRAs offer different tax advantages. Money in an IRA is invested which allows it to potentially grow in value over time.

  • 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 a pension, but in 1981, the government made them eligible for all workers and spouses.

  • 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 situation.

  • 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.

  • How are IRAs taxed?

    Money in a traditional IRA is not taxed until you withdraw it in retirement. At that time, the amount you pay in taxes depends on your adjusted gross income and any tax deductions you claim when filing your tax return. Money you contribute to a Roth IRA is made with after-tax dollars, so you do not pay taxes on distributions or withdrawals in retirement.

  • 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.

  • 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.

  • 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 rollover 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.

Key Terms

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