An individual retirement account (IRA) is a long-term savings account that individuals with earned income can use to save for the future and enjoy certain tax advantages. The IRA is designed primarily for self-employed people who do not have access to workplace retirement accounts such as a 401(k), which is available only through employers. You can open an IRA through a bank, an investment company, an online brokerage, or a personal broker. Individual retirement accounts (IRAs) are retirement savings accounts with tax advantages. Types of IRAs include traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. Money held in an IRA usually can’t be withdrawn before age 59½ without incurring a hefty tax penalty of 10% of the amount withdrawn.

There are annual income limitations that apply to deducting contributions to traditional IRAs and contributing to Roth IRAs. IRAs are meant to be long-term retirement savings accounts. If you take money out early, you defeat that purpose by diminishing your retirement assets.

How Does an IRA Work?
Anyone with earned income can open and contribute to an IRA, including those who have a 401(k) account through an employer. The only limitation is on the total that you can contribute to your retirement accounts in a single year.
When you open an IRA, you can choose to invest in a wide range of financial products, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. There are even self-directed IRAs (SDIRAs) that permit investors to make all the investing decisions. SDIRAs offer access to a broader selection of investments, including real estate and commodities.

Only the riskiest investments are off-limits.
There are several kinds of IRAs, including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. Each has different rules regarding eligibility, taxation, and withdrawals.
Individual taxpayers can establish traditional and Roth IRAs, and small business owners and self-employed individuals can set up SEP and SIMPLE IRAs. An IRA must be opened with an institution that has received Internal Revenue Service (IRS) approval to offer these accounts. Choices include banks, brokerage companies, federally insured credit unions, and savings and loan associations.

Because IRAs are meant for retirement savings, there is usually an early withdrawal penalty of 10% if you take money out before age 59½. However, there are some notable exceptions—withdrawals for educational expenses and first-time home purchases, among others. If your IRA is a traditional account rather than a Roth account, you will also owe income tax on an early withdrawal.
You can only contribute to an IRA if you have earned income that meets the IRS definition. Income from interest and dividends, Social Security benefits, or child support does not count.

What Are the Different Types of IRAs and Their Rules?
The following is a breakdown of the different types of IRAs and the rules regarding each one.
Traditional IRA
In most cases, contributions to traditional IRAs are tax deductible. So if you put $4,000 into an IRA, your taxable income for the year decreases by that amount. Then, when you withdraw the money in retirement, it is taxed at your ordinary income tax rate. Your money grows tax-deferred in a traditional IRA.
For 2022, the maximum annual individual contribution to traditional IRAs is $6,000. If you are age 50 or older, you can also contribute a catch-up contribution of $1,000 for a total of $7,000.
For 2023, the maximum annual individual contribution is $6,500. The catch-up contribution continues to be $1,000 for those 50 and over.
If you don’t have a retirement plan at work, your traditional IRA contributions are fully deductible. But if you (or your spouse, if you are married) have a retirement plan at work, such as a 401(k) or 403(b), your modified adjusted gross income (MAGI) determines whether, and how much of, your traditional IRA contributions can be deducted.
If you have a retirement plan at work:
For 2022, if you are single or file as head of household and have a retirement plan at work, your traditional IRA contributions are fully deductible if your MAGI is below $68,000. For 2023, your MAGI must be below $73,000.
If you are married and filing jointly, for 2022, your traditional IRA contributions are fully deductible if your MAGI is below $109,000. For 2023, your MAGI must be below $116,000. From there, the deductibility of your contributions starts to phase out as your MAGI increases.
It is possible to have both a Roth IRA and a traditional IRA, or several IRAs at different institutions. However, the total annual contribution to all of your IRAs cannot exceed $6,000 (or $7,000 for those age 50 or older) for 2022 and $6,500 (or $7,500 for those age 50 or older) for 2023. For 2022, the income range that phases out the deductibility of traditional IRA contributions for married couples is $109,000 to $129,000. For 2023, it's $116,000 to $136,000.
For single taxpayers or heads of households, the phase out range is $68,000 to $78,000. For 2023, it's $73,000 to $83,000. If you contribute to an IRA and aren't covered by a workplace plan but are married to someone who is, the income phaseout range in 2022 is $204,000 to $214,000. For 2023, it's $218,000 to $228,000.
Use this chart to see where you fit.
Deduction Limits If You Have a Retirement Plan at Work Filing Status 2022 MAGI 2023 MAGI Deduction
Single or Head of Household
$68,000 or less $73,000 or less Full deduction up to your contribution level More than $68,000 but less than $78,000 More than $73,000 but less than $83,000 Partial deduction $78,000 or more $83,000 or more No deduction Married Filing Jointly $109,000 or less $116,000 or less Full deduction up to your contribution level More than $109,000 but less than $129,000 More than $116,000 but less than $136,000 Partial deduction $129,000 or more $136,000 or more No deduction Married Filing Separately Less than $10,000 Less than $10,000 Partial deduction $10,000 or more $10,000 or more No deduction

Roth IRA Roth IRA contributions are not tax deductible, but qualified distributions are tax free. That means you contribute to a Roth IRA using after-tax dollars and pay no taxes on investment gains or withdrawals.
Also, Roth IRAs do not have required minimum distributions (RMDs). If you don’t need the money, you don’t have to take it out of your account. You can contribute to a Roth IRA as long as you have eligible earned income, no matter how old you are. Roth IRA contribution limits for the 2022 and 2023 tax years are the same as they are for traditional IRAs. However, there is a catch: There are income limitations on contributions to a Roth IRA. The phaseout range for single filers is $129,000 to $144,000 for 2022 and $138,000 to $153,000 for 2023. For married couples filing joint taxes, the phaseout range is $204,000 to $214,000 in 2022 and $218,000 to $228,000 in 2023.

Income Limits for Contributing to a Roth IRA
Filing Status 2022 MAGI 2023 MAGI Contributions Single or Head of Household Less than $129,000 Less than $138,000 Up to the limit $129,000 to less than $144,000 $138,000 to less than $153,000 Reduced amount $144,000 or more $153,000 or more Zero Married Filing Jointly or Qualifying Widow(er) Less than $204,000 Less than $218,000 Up to the limit $204,000 to less than $214,000 $218,000 to less than $228,000 Reduced amount $214,000 or more $228,000 or more Zero Married Filing Separately Less than $10,000 Less than $10,000 Reduced amount $10,000 or more $10,000 or more Zero

SEP IRA
Self-employed individuals such as independent contractors, freelancers, and small-business owners can set up SEP IRAs.
A SEP IRA adheres to the same tax rules for withdrawals as a traditional IRA. For 2022, SEP IRA contributions are limited to 25% of compensation or $61,000, whichever is less. For 2023, the maximum allowed contribution is $66,000.
Business owners who set up SEP IRAs for their employees can deduct the contributions that they make on behalf of employees. However, the employees cannot contribute to their accounts, and the IRS taxes their withdrawals as income.

SIMPLE IRA
The SIMPLE IRA is also intended for small businesses and self-employed individuals. This type of IRA follows the same tax rules for withdrawals as a traditional IRA. Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions to their accounts, and the employer is required to make contributions as well. All the contributions are tax deductible, potentially pushing the business or employee into a lower tax bracket.
The SIMPLE IRA employee contribution limit is $14,000 in 2022 and the catch-up limit (for workers ages 50 and older) is $3,000. For 2023, the contribution limit is $15,500 and the maximum catch-up amount is $3,500.

Wash-Sale Rule and IRAs
In 2008, the IRS issued Revenue Ruling 2008-5, which states that IRA transactions can trigger the wash-sale rule. Should shares be sold in a non-retirement account, followed by the purchase of substantially identical shares in an IRA within a 30-day period, the investor cannot claim tax losses for the sale. The investment’s basis in the individual’s IRA won’t increase, either.

What Are Required Minimum Distributions (RMDs)?
Starting at age 72, holders of traditional IRAs must begin taking RMDs, which are based on account size and the person’s life expectancy. Failure to do so may result in a tax penalty equal to 50% of the amount of the required distribution.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act increased the age requirement for taking RMDs from 70½ to 72. It also eliminated the age limit at which a person can no longer contribute to an IRA, which was 70½. A person of any age with earned income can now contribute to an IRA.
Comparing IRA Options
Use the chart below to get a better sense of how the different IRAs work.
Note: To view the full chart, use the slider at the bottom to see the column at the far right.
Comparing IRA Types
IRA Type Contribution Limit (2022) Tax-Deductible Contributions? Tax-Free Distributions? Subject to Required Minimum Distributions Beginning at Age 72? Who Can Establish Traditional $6,000; $7,000 if age 50 or older Yes, but individual deduction amounts are based on income, filing status, and retirement plan coverage through your employer No Yes Individual taxpayers and couples Roth $6,000; $7,000 if age 50 or older No Yes Not in the account holder’s lifetime (heirs of Roth accounts are subject to RMDs) Individual taxpayers and couples, subject to MAGI limitations SEP The lesser of 25% of compensation or $61,000 Business deductions for employee contributions are limited to the lesser of your total contributions or 25% of employees’ compensation. Self-employed individuals must use a special formula to calculate the amount of contributions that they can deduct. No Yes Small business owners and self-employed individuals SIMPLE $14,000; $17,000 if age 50 or older All contributions made to employees’ SIMPLE IRAs by the plan owner are tax deductible—self-employed individuals can also deduct contributions made to their own SIMPLE IRA No Yes Small business owners and self-employed individuals What Are the Advantages of an Individual Retirement Account (IRA)? An individual retirement account (IRA) provides a tax-advantaged way to save for retirement. Depending on what type of IRA you use, an IRA can reduce your tax bill either when you make contributions or when you take withdrawals in retirement. Investment gains are usually tax deferred or tax free.
Also, IRAs are insured by the Federal Deposit Insurance Corp. (FDIC), a government-run agency that provides protection when a financial institution fails. The FDIC covers customer deposits—up to $250,000 per account in most cases—that are held at FDIC-insured banks or savings and loan associations.

How Can I Start a Roth IRA or a Traditional IRA?
You can open your IRA at most banks, credit unions, or other financial services providers. Fidelity, Charles Schwab, and E*Trade are all brokers that provide IRAs. Opening an account is as easy as visiting their branch or website and providing your bank and tax information.

When Can I Withdraw From an IRA?
The best time to withdraw from an IRA is after age 60. If you withdraw before age 59½, you will incur a 10% early withdrawal penalty, in addition to taxes on the withdrawal. There are some exceptions to this penalty for medical expenses, disabilities, or other unusual life events. Generally speaking, the longer you can wait before taking distributions, the more time that money has to grow.

How Is a 401(k) Plan Different From an IRA?
Both 401(k) plans and IRAs provide tax advantages to employees investing for their retirement. The main difference is who provides the plan. A 401(k) plan is usually provided by an employer, with contributions automatically deducted from the employee’s paycheck.
Some companies will also match their employee’s contributions. 401(k) plans have higher contribution limits, but an IRA can be set up by anyone, regardless of whether they have a 401(k) plan at work. Most 401(k) plans offer a limited range of mutual funds and exchange-traded funds (ETFs), while a typical IRA offers a wider range of funds, stocks, and other securities.

The Bottom Line
IRAs are retirement savings accounts that offer tax advantages. They work a bit like a 401(k), but they don’t require an employer to sponsor them. There are several types of IRAs: traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. There are annual income limitations on deducting contributions to traditional IRAs and contributing to Roth IRAs, so there is a limit on how much tax you can avoid by investing in an IRA.
IRAs are meant to be long-term retirement savings accounts. If you take money out early, you defeat that purpose by diminishing your retirement assets. That’s why money held in an IRA usually can’t be withdrawn before age 59½ without incurring a hefty tax penalty of 10% of the amount withdrawn (in addition to normal taxes owed).

Rollover IRA
One way to take control of your retirement savings is to roll over your prior retirement plan from a former employer.

Why roll over to an IRA?
It is a process that allows you to move funds from your previous employer-sponsored retirement plan, a 401(k), for example, into an IRA. When you roll over your old retirement account into an IRA, you can preserve the tax-deferred status of your retirement assets without paying current taxes or early withdrawal penalties at the time of transfer.
When it comes to rolling over a prior retirement plan, you have other options. Before you start the rollover process, be sure to review all your options, including:
Leaving your money in your former employer's plan if your former employer permits it Rolling over your money to a new 401(k) plan if this option is available Rolling over your 401(k) to an IRA Taking a cash distribution, which could result in taxes and a 10% penalty Learn more