IRA (Individual Retirement Account)
Definition
A personal tax-advantaged retirement account that you open independently (not through an employer). Traditional IRAs offer tax-deductible contributions; Roth IRAs offer tax-free withdrawals.
An Individual Retirement Account is a personal retirement savings vehicle that provides tax advantages to encourage long-term saving. Unlike a 401(k), an IRA is opened at a brokerage or bank of your choice, giving you full control over investment options.
The two main types are Traditional IRA (contributions may be tax-deductible, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income) and Roth IRA (contributions are made with after-tax dollars, investments grow tax-free, and qualified withdrawals are completely tax-free).
For 2025, the IRA contribution limit is $7,000 ($8,000 if you're 50 or older). This limit is much lower than 401(k) limits, which is why many people use both. The traditional IRA deduction phases out at certain income levels if you're covered by an employer plan; Roth IRA contributions phase out for higher earners.
IRAs offer significantly more investment flexibility than most 401(k) plans. You can invest in individual stocks, any ETF or mutual fund, bonds, REITs, and some alternative investments. This freedom, combined with the ability to choose a low-cost brokerage, often makes IRAs the better choice for investment options beyond the employer match.
IRA rollovers from old 401(k) plans are common when you change jobs. A rollover consolidates your retirement accounts, provides more investment options, and potentially reduces fees. Always do a direct rollover (trustee-to-trustee) to avoid the 20% mandatory withholding that applies to indirect rollovers.
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Frequently Asked Questions
Can I have both a 401(k) and an IRA?
Yes. You can contribute to both a 401(k) and an IRA in the same year. However, your traditional IRA deduction may be limited if you're covered by an employer plan and your income exceeds certain thresholds. Roth IRA contributions also have income limits.
What's the penalty for early IRA withdrawal?
Withdrawing before age 59.5 generally incurs a 10% early withdrawal penalty plus ordinary income tax on traditional IRA withdrawals. Roth IRA contributions (not earnings) can be withdrawn penalty-free at any time. Several exceptions exist: first home purchase, education, disability, and substantially equal periodic payments.