IRA (Individual Retirement Account)
A retirement account you open on your own — not through work. Traditional IRAs give you a tax break now; Roth IRAs give you tax-free money in retirement.
Think of an IRA as your personal retirement savings account — one you control completely. Unlike a 401(k) that's tied to your employer, you open an IRA at a brokerage or bank of your choice, which means you pick from a much wider menu of investments.
The two main flavors: a Traditional IRA lets you deduct contributions from your taxes now (lowering this year's bill), but you'll pay taxes on withdrawals in retirement. A Roth IRA flips that — you contribute money you've already paid taxes on, but everything you withdraw in retirement is completely tax-free, growth included.
For 2025, you can put in up to $7,000 ($8,000 if you're 50 or older). That's quite a bit less than 401(k) limits, which is why a lot of people use both. Keep in mind: the traditional IRA deduction phases out at certain income levels if you're covered by a plan at work, and Roth contributions phase out for higher earners.
Where IRAs really shine is investment flexibility. You can buy individual stocks, any ETF or mutual fund, bonds, REITs — far more options than most 401(k) plans offer. Pair that freedom with a low-cost brokerage, and an IRA is often the smarter home for your money beyond what's needed to grab your employer match.
Rolling over an old 401(k) into an IRA is one of the most common moves when you switch jobs. It consolidates your accounts, opens up better investment options, and can cut your fees. Just make sure you do a direct rollover (trustee-to-trustee) to avoid the 20% mandatory withholding that comes with indirect rollovers.
Frequently Asked Questions
▸Can I have both a 401(k) and an IRA?
Absolutely. You can contribute to both in the same year. The one thing to watch: if you're covered by an employer plan and your income is above certain thresholds, your traditional IRA deduction may be limited. Roth IRAs also have their own income limits.
▸What's the penalty for early IRA withdrawal?
Pulling money out before 59.5 generally means a 10% penalty plus income tax on traditional IRA withdrawals. With a Roth, you can always withdraw your contributions (not earnings) penalty-free. There are also exceptions for things like buying your first home, education expenses, disability, and a few others.
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