Roth & IRA’s Explained ( Individual Retirement Accounts ) | Roth IRA index funds. What is an IRA? An individual retirement account (IRA) is a tax-deferred investment account that helps you save for retirement. There are four popular types of IRAs — traditional, Roth, SEP and SIMPLE — and all offer tax benefits that reward you for saving.
You can open an IRA at banks, robo-advisors and brokers, and your contributions may be tax-deductible, or withdrawals may be tax-free.
Some people might hear IRA and think Irish Republican Army, that’s not what we’re talking about here. We’re describing the retirement accounts the IRS officially calls individual retirement arrangements.
How do IRAs work?
Investing in an IRA allows your money to grow and compound, says certified financial planner Matt Aaron, founder of Washington, D.C.-based Lux Wealth Planning, an affiliate of Northwestern Mutual. You can invest in stocks, bonds and other assets. How your account balance grows over time depends on how you invest and how much you contribute to the IRA. (See how to invest your IRA for simple investment strategies.)
“You have to always take into consideration your financial situation and risk tolerance, but anybody who doesn’t need the money in the next five years, should be more equity-oriented,” Aaron says. That means investing in stocks and having an IRA.
“That’s the way you outperform inflation,” he says.
IRAs have annual contribution limits. Generally, you (or your spouse) must have earned income to contribute to an IRA. There are withdrawal rules. You may face a 10% penalty and a tax bill if you withdraw money before age 59 1/2, unless you qualify for an exception.
What are the types of IRAs?
There are four popular types of IRAs: traditional, Roth, SEP and SIMPLE. Here’s an overview:
Traditional IRA
Contributions to traditional IRAs are often tax-deductible. For example, contributing $6,000 to a traditional IRA could reduce the amount of your taxable income by $6,000. However, withdrawals from traditional IRAs in retirement are taxable as ordinary income. The contribution limit for traditional IRAs in 2021 and 2022 is $6,000 per year. People 50 and older can contribute up to $7,000 per year.
If you’re married and you or your spouse has a retirement plan at work, the amount of your traditional IRA contribution that you can deduct is reduced, or eliminated altogether, once you hit a certain income. You can still make contributions, but they won’t be tax-deductible. If you and your spouse don’t have retirement plans at work, then you can deduct your IRA contribution no matter how much your income.

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