What Is an IRA? Pros and Cons

Written by Dayana Yochim
Edited by Carolyn Kimball
Fact-checked by Andrea Coombes

November 12, 2024

The IRA (individual retirement account) was created by the U.S. government to give individuals a tax-advantaged retirement savings option not tied to a person’s employer. If you don’t have access to a workplace retirement plan like a 401(k), or you want to put aside additional money for the future, an IRA is might be for you.

Since 1974, when the IRA was introduced, other models have been added to the lineup to suit all types of savers. For example, SEP IRAs are designed for small-business owners and sole proprietors. The spousal IRA is for nonworking spouses (or ones that earn a low income). But the most newsworthy entrant to the IRA canon came in the 1990s with the debut of the Roth IRA, which provided a different type of tax break than the classic (aka traditional) IRA.

Pros and cons of IRAs

thumb_up_off_alt Pros

Tax-free investment growth. All IRAs provide shelter from taxation while your money is in the account.
Tax breaks. Depending on the IRA type (traditional IRA or Roth IRA), you may qualify for a tax break when investing in an IRA.
Early access to your money. With a Roth IRA, you’re allowed to withdraw your contributions at any time and for any reason.
Note: Early withdrawals (before age 59½) from a traditional IRA are subject to taxes and penalties).
Investment options. All of the best stock brokers that offer IRAs — Fidelity, Vanguard, Charles Schwab, E*TRADE, etc. — offer mutual funds, stocks, bonds, and more.

thumb_down_off_alt Cons

Contribution limits.The IRS caps the amount individuals are allowed to contribute each year to tax-favored retirement accounts.
Required minimum withdrawals (RMDs). The IRS requires you to start withdrawing money from a traditional IRA at age 72. If you don't, you’ll pay a 50% tax on the amount you were supposed to withdraw.
Penalties for early withdrawals. IRAs are designed for long-term savings; you aren’t supposed to withdraw money before the age of age 59½. Breaking the protected tax shield earlier can subject you to a 10% early withdrawal penalty.

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Who is allowed to open an IRA?

As long as you earned income (or are married to someone who did) during the year of your contribution, you’re eligible to open an IRA.

How do I open an IRA?

Opening an IRA is similar to opening a bank account. Only instead of your regular bank, in most cases you set up an account with a brokerage company — think Fidelity, Vanguard, J.P Morgan and the like. Because the field of companies vying for your IRA business is extremely competitive, it’s easy to find providers with $0 account minimums, no maintenance fees, and plenty of customer support. Check out our picks for the best IRA accounts.

Then, you'll need to decide how much money you want to contribute. There is no minimum amount you need to open an IRA (though you, or your spouse, must have earned income). But the IRS does have limits on how much it allows individuals to save each year (it can’t be more than you earn during the year).

What are the contribution limits for IRAs?

Here are the contribution ceilings for four popular IRA types:

Traditional IRA: In 2023, the contribution limit is $6,500 (or $7,500 if age 50 or older). In 2024, the limit increases to $7,000 (or $8,000 if age 50 or older). Deductibility of contributions is phased out or eliminated if you (or your spouse) have a workplace retirement plan and your income reaches specified limits.

Roth IRA: In 2023, the contribution limit is $6,500 (or $7,500 if age 50 or older). In 2024, the limit increases to $7,000 (or $8,000 if age 50 or older). The ability to contribute phases out and then disappears at higher income levels.

Spousal IRA (Roth or traditional): In 2023, the contribution limit is $6,500 (or $7,500 if age 50 or older). In 2024, the limit increases to $7,000 (or $8,000 if age 50 or older). A nonworking spouse can contribute the same amount as the household wage earner is allowed. Total combined IRA contributions cannot exceed taxable compensation reported on your joint return.

SEP IRA (traditional only, Roth not available): In 2023, the contribution limit is $66,000 or 25% of compensation, whichever is less. In 2024, the limit increases to $69,000 or 25% of compensation, whichever is less. If you’re a business owner and choose to open a SEP IRA, you must provide SEP accounts to any eligible employees and contribute an equal percentage of each worker’s salary to their accounts as you do your own.

Source: IRS.gov traditional IRA, Roth IRA 2023 and 2024, spousal IRA, SEP IRA rules

editA note about contribution limits:

If you’re reading this in 2024, you may wonder why we included 2023 contribution limits in this table. That’s because Uncle Sam gives you until the tax filing due date (April 15, 2024) for you to contribute to an IRA for the previous year. Just make sure if you’re opening or contributing to an IRA for the previous year to indicate that it’s a 2023 contribution.

How do I pick investments in an IRA?

With an IRA, you can choose how to invest the money in the account. While some banks offer IRAs, the benefit of opening an IRA with an online stock broker is that you have access to investments designed to help your money grow until you need it in retirement. Within an IRA you can pick from any of the assets your broker offers — mutual funds, individual stocks, bonds, exchange-traded funds (ETFs), and more. Unlike employer-sponsored retirement plans (401(k)s, 403(b)s and the like), you’re not limited to a pre-set menu of investment options.

Do IRAs offer tax breaks?

IRAs offer retirement savers two tax breaks.

Tax break No. 1: Everyone who invests in an IRA pays no taxes on investment growth within the IRA

Tax break No. 2: For this one, you have a choice: Take the break right now, when you fund your IRA, or save it until later when you start making withdrawals. This decision comes down to choosing either the Roth or the traditional version of an IRA.

If you want to minimize your tax bill today, opt for a traditional IRA: With a traditional IRA, your contributions are made with pre-tax dollars. That means that the amount you put in the account is subtracted (aka deducted) from your taxable income for the year. (For example, a $5,000 contribution may lower your taxable income by $5,000.) The result: You owe the IRS less when you file your tax return for the year. Taxes eventually come back into play when you start withdrawing money from the account in retirement, at which point distributions (the fancy name for withdrawals) will be taxed as income.
If you want tax-free withdrawals in retirement, choose a Roth IRA: With a Roth IRA, you forgo the upfront tax break you get on traditional IRA contributions. You use post-tax dollars to fund the account (that is, any money you contribute will still be counted in your taxable income for the year, just as if you hadn’t contributed it). However, withdrawals in retirement are completely tax-free because you already paid income taxes on the money before you put it in savings.

Check out our guide to the differences between the Roth IRA vs. Traditional IRA.

» Price tag: See our quick and easy explainer on how much it costs to open an IRA.

Types of IRAs

In addition to Roth and traditional IRAs, there are a few other types worth knowing about. Here’s a handy comparison table to illustrate the basics of six popular types of IRAs:

Type	Contribution requirements	Taxes	Best for those who…	Tricky stuff
Traditional IRA	Anyone with earned income can contribute	Contributions may be deductible Investments grow tax-deferred Withdrawals in retirement are taxed as income	Have no access to a workplace plan Want to augment workplace savings with an additional tax-advantaged account	Deductibility of contributions may be limited based on income and household access to a workplace retirement plan
Roth IRA	Eligibility to contribute based on income	Contributions are not deductible Investments grow tax-free Withdrawals in retirement are completely tax-free	May need to dip into the money before retirement (contributions can be withdrawn penalty-/tax-free) Want to augment workplace savings with an additional tax-advantaged account	There’s no penalty for withdrawing contributions (not investment earnings) at any time
Spousal IRA (Roth or traditional) for nonworking spouses	Must file a joint tax return	Same tax treatment as regular Roth/traditional IRAs	Nonworking/low-income spouses Note: This is not a joint IRA. The account is completely separate, regardless of who funds it.	Contributions/deductibility limits are the same as those for the working spouse
SEP IRA (Self employed person) for business owners	Must be an employer or self-employed	Same as a traditional IRA: Contributions may be deductible on your business tax return (see IRS for details) Investments grow tax-deferred Withdrawals in retirement are taxed as income	Are self-employed/have a small business Want to contribute to employee retirement savings	There is no Roth version of a SEP IRA If you have a second job that offers a retirement plan, you’re allowed to contribute to both at the same time
Rollover IRA (moving money from an existing IRA or from a workplace plan at a former employer)	No limit on amount you transfer from an existing investment account	Same tax treatment as the account money is moved from	Want to consolidate accounts and/or move money from a former employer’s plan	To avoid taxes/penalties, you must move money from a like account (e.g., a Roth to a Roth) Research “direct rollovers” to avoid getting taxed on the entire balance.
Nondeductible IRA (if ineligible for a deductible traditional IRA or a Roth IRA)	Must have earned income	No upfront tax break on contributions Investment grows tax-deferred A portion of withdrawals in retirement are taxed as ordinary income	High earners who don’t qualify for a Roth or a fully deductible traditional IRA	You still report your nondeductible contribution on your taxes to avoid paying income taxes twice

Source: IRS.gov

IRS rules you should know

As pointed out earlier, anyone with earned income is allowed to contribute to an IRA. And now, the caveats: Not everyone can take full advantage of the tax benefits of traditional IRAs, and Roth IRAs prohibit high-income people from contributing.

Traditional IRA deductibility rules

With a traditional IRA, if you (or your spouse, if you’re married) have a retirement plan at work, then your ability to claim a tax deduction may be limited or completely erased. If neither you (nor your better half) has a retirement plan at work, you can take the full deduction. But if one of you is covered by a workplace plan, the amount of your deduction starts to ratchet down based on your income level.

The following tables shows at what point deductibility of your traditional IRA contributions starts to phase out depending on your tax filing status, modified adjusted gross income (AGI), and availability of a workplace retirement plan, such as a 401(k), 403(b) or 457 plan:

2023/2024 traditional IRA deduction limits if you ARE covered by a workplace retirement plan

If your tax filing status is…	and your modified AGI is…	then you can take…
single or head of household	2023: $73,000 or less 2024: $77,000 or less	a full deduction up to the amount of your contribution limit
single or head of household	2023: more than $73,000 but less than $83,000 2024: more than $77,000 but less than $87,000	a partial deduction
single or head of household	2023: $83,000 or more 2024: $87,000 or more	no deduction
married filing jointly or qualifying widow(er)	2023: $116,000 or less 2024: $123,000 or less	a full deduction up to the amount of your contribution limit
married filing jointly or qualifying widow(er)	2023: more than $116,000 but less than $136,000 2024: more than $123,000 but less than $143,000	a partial deduction
married filing jointly or qualifying widow(er)	2023: $136,000 or more 2024: $143,000 or more	no deduction
married filing separately	2023 and 2024: less than $10,000	a partial deduction
married filing separately	2023 and 2024: $10,000 or more	no deduction

Source: IRS.gov IRA deduction rules if you are covered by a retirement plan at work (2023 and 2024)

2023/2024 traditional IRA deduction limits if you are NOT COVERED by a workplace retirement plan

If your tax filing status is…	and your modified AGI is…	then you can take…
single, head of household, or qualifying widow(er)	2023 and 2024: any amount	a full deduction up to the amount of your contribution limit
married filing jointly or separately with a spouse who is not covered by a plan at work	2023 and 2024: any amount	a full deduction up to the amount of your contribution limit
married filing jointly with a spouse who is covered by a plan at work	2023: $218,000 or less 2024: $230,000 or less	a full deduction up to the amount of your contribution limit
married filing jointly with a spouse who is covered by a plan at work	2023: more than $218,000 but less than $228,000 2024: more than $230,000 but less than $240,000	a partial deduction
married filing jointly with a spouse who is covered by a plan at work	2023: $228,000 or more 2024: $240,000 or more	no deduction
married filing separately with a spouse who is covered by a plan at work	2023 and 2024: less than $10,000	a partial deduction
married filing separately with a spouse who is covered by a plan at work	2023 and 2024: $10,000 or more	no deduction

Source: IRS.gov IRA deduction rules if you (or a spouse) is not covered by a workplace retirement plan (2023 and 2024)

Roth IRA contribution rules

With a Roth IRA the amount you’re allowed to contribute starts to phase out when your earnings hit a certain level:

2023/2024 Roth IRA contribution limits based on income

If your tax filing status is…	and your modified AGI is…	then you can take…
married filing jointly or qualifying widow(er)	2023: less than $218,000 2024: less than $230,000	up to the limit
married filing jointly or qualifying widow(er)	2023: between $218,000 and $228,000 2024: between $230,000 and $240,000	a reduced amount
married filing jointly or qualifying widow(er)	2023: $228,000 or more 2024: $240,000 or more	zero
married filing separately and you lived with your spouse at any time during the year	2023: less than $10,000 2024: less than $10,000	a reduced amount
married filing separately and you lived with your spouse at any time during the year	2023: $10,000 or more 2024: $10,000 or more	zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	2023: less than $138,000 2024: less than $146,000	up to the limit
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	2023: between $138,000 and $153,000 2024: between $146,000 and $161,000	a reduced amount
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	2023: $153,000 or more 2024: $161,000 or more	zero

Source: IRS.gov Roth contribution limits for 2023 and 2024

References

IRS.gov Traditional IRAs, IRS.gov Roth IRAs, Exceptions to Tax on Early Distributions, IRS.gov Contribution Limits for 2024, IRS.gov Roth Contribution Limits for 2023, IRS.gov IRA Deduction Rules for Work Retirement Plans 2023, IRS.gov IRA Deduction Rules if Not Covered by Workplace Retirement Plan 2023

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About the Editorial Team

Dayana Yochim is a former Senior Writer/Editor at Reink Media Group who has written about personal finance and investing for more than 20 years. Her work has appeared in outlets including HerMoney.com, NerdWallet and the Motley Fool, and has been syndicated nationally. Dayana has also been a guest expert on "Today" and Good Morning America.

Carolyn Kimball is a former managing editor for StockBrokers.com and investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money.

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.