What is an IRA?

Saving for retirement helps build your financial future. Like any other construction project, you need the right tools to get the job done. Meet the individual retirement account (IRA), an investment account that might deserve a spot in your toolbox. Here's what IRAs are, how they work, the potential tax benefits they offer, and how to open one.

What is an IRA?

An IRA typically refers to a tax-advantaged account designed to help you save for retirement on your own, independent of an employer. That's in contrast to workplace retirement accounts like 401(k)s and 403(b)s, which require an employer sponsor. That said, some varieties of IRA are geared toward small business owners and their employees.

There are several types of IRAs, but when people say "IRA" alone, they often mean a traditional IRA. That's a type anyone with earned income can open and contribute to.

How does an IRA work?

The way an IRA works depends on the type of IRA, though they all may offer tax advantages to help make saving and investing for retirement easier. For instance, a traditional IRA allows you to set aside after-tax dollars for retirement that may be tax-deductible if you meet income eligibility, subject to income limits.

Types of IRAs

Here's a rundown of some of the most common types of IRAs:

Traditional IRAs

Traditional IRAs allow you to save on income taxes now and pay them later in retirement, when you could be in a lower tax bracket and therefore owe less in taxes.

• Eligibility: Available to anyone with earned income.
• Contribution limits:
  • You cannot contribute more than your earned income for a given year. So if you earned $6,000 total, that's all you can put toward your personal IRAs, even though the IRS contribution limit is higher.

• Tax rules:
  • You may be able to deduct some or all of your contributions to the account from your federal income taxes, depending on your modified adjusted gross income (MAGI), filing status, and whether your employer or your spouse's offers a workplace savings plan.¹
  • Any investments in your IRA grow tax-deferred until withdrawal.
  • Withdrawals of earnings and deductible contributions are taxed like any other income you earn in the year they're taken, if they're qualified.

• Contribution deadline: Unextended tax filing deadline for the year you are contributing— April 15, 2026 for tax year 2025.
• Withdrawal rules:
  • Penalty-free withdrawals may start at age 59½.
  • Required minimum distributions (RMDs) begin at age 73.
  • Early withdrawals (before age 59½) generally trigger both ordinary income taxes and a 10% penalty.
  • You can withdraw penalty-free for certain expenses, such as your first home purchase, a birth or adoption, and qualified higher education expenses.²

Roth IRAs let you save and invest post-tax dollars and benefit from potential tax-free growth and withdrawals later.

• Eligibility: You are eligible to contribute if you earned income in the tax year for which you are contributing and your MAGI was below the Roth IRA income limits.
• Contribution limits:
  • You can contribute up to $7,500 in 2026 across all personal IRAs.
  • Those age 50 and older can contribute an additional $1,100 catch-up contribution in 2026.
  • You cannot contribute more than your earned income for 2026.
  • Your contribution limit may be reduced if your income exceeds certain thresholds based on your filing status.
• Tax rules:
  • Contributions are not tax-deductible.
  • Investment growth in your Roth IRA is federally tax-free, and withdrawals of earnings are tax-free if you're at least age 59½ and your account meets the 5-year aging rule.³
• Contribution deadline:
  • Unextended tax filing deadline for the year you are contributing—April 15, 2026 for tax year 2025.
• Withdrawal rules:
  • You can withdraw your contributions, without taxes or penalties, at any time for any reason.
  • Any earnings from contributions can be withdrawn penalty-free once you're at least age 59½. If your account hasn't yet met the 5-year aging rule, earnings will be subject to tax.
  • There are no RMDs for Roth IRAs.

Rollover IRAs

A rollover IRA is a type of account where you can consolidate and manage your old workplace savings accounts into an IRA. You could also roll over existing IRAs into a single IRA.

• Eligibility: You're eligible if you have funds from a previous employer's workplace savings plan (401(k)s, 403(b)s, 457(b)s, pensions, and other employer-sponsored retirement plans) or other IRAs.
• Tax rules:
  • With a direct rollover, your previous custodian (the company that holds your retirement money) sends your funds directly to your new custodian, so it's not a taxable event.
  • With an indirect rollover, your previous employer's plan cuts you a check for your balance. If you keep some of the cash, and you're rolling money from a traditional 401(k), you'll pay a 20% mandatory tax withholding, unless an exception applies.
• Rollover rules:
  • Typically, you can't roll over funds from a workplace plan sponsored by your current employer.
  • IRA rollovers don't count toward the annual IRA contribution limit.
  • Even though you can make as many direct rollovers as you want each year, you're only permitted to make one indirect rollover between IRAs per year.

A rollover IRA is just one option—here's our guide to learn about other options for old workplace plans.

SIMPLE IRAs

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a workplace retirement savings plan for small businesses. If your employer offers a SIMPLE IRA, then as an employee you can choose to defer a portion of your salary into your retirement account, and then your employer has the option to either match that contribution or contribute a fixed percentage based on the employee's compensation.

• Eligibility: Employers with 100 or fewer employees, and employees of offering employers earning at least $5,000 in the last 2 years, unless plan guidelines state otherwise. Employers can make requirements less strict, though, or make plans open to all employees.
• Contribution limits:

For more information, check out our guide to SIMPLE IRA contribution limits.

• Tax rules:
  • Similar to a 401(k), contributions are made via payroll deduction and are not subject to income tax.
  • Similar to a traditional IRA, contributions can be invested, and growth is tax-deferred if withdrawn after age 59½ or for another qualified reason.

• Withdrawal rules:
  • You have to pay income tax on withdrawals.
  • There are RMDs starting at age 73.
  • Unqualified withdrawals in the first 2 years of opening the account may be subject to a 25% tax penalty in addition to income taxes.
  • After the account is 2 years old, unqualified withdrawals are subject to a 10% tax penalty in addition to income taxes.

• Contribution deadline:
  • Employers must deposit employees' salary reduction contributions to a SIMPLE IRA within 30 days after the end of the month when the employee would have received them in cash.
  • Employers must make matching or non-elective contributions by the business' federal tax due date, including extensions, for the year.

SEP IRAs

The Simplified Employee Pension plan (SEP) IRA is a workplace retirement savings plan best suited to self-employed individuals, small-business owners, and members of a partnership. Generally the only contributor is the employer, whether that's a self-employed person acting as their own employer or a small-business owner contributing to the employees' SEP accounts.

• Eligibility:
  • SEP IRAs are available to the self-employed and to businesses of all sizes. Because the employer must contribute an equal percentage of income to all eligible employees' accounts, business owners tend to offer SEP IRAs only when they have just a few staffers.⁴
  • As an employee of a business offering a SEP IRA, you're eligible if you:
    1. Earn at least $750 in 2025 or $800 in 2026 from that business.
    2. Are at least 21 or older in that year.
    3. Have worked for the employer in at least 3 of the last 5 years.
  • Qualifications can be less strict if plan terms allow.
• Contribution limits:

• Tax rules:
  • Contributions to a SEP IRA are tax-deductible for the business, not for the employee.
  • Like a traditional IRA, investment growth is tax-deferred, but you have to pay income tax on withdrawals.
• Withdrawal rules:
  • Penalty-free withdrawals start at age 59½.
  • RMDs begin at age 73.
• Contribution deadline: Contributions must be made by the business' tax filing deadline, including extensions.

Traditional IRA vs. Roth IRA

The main differences between a traditional IRA and a Roth IRA are the eligibility requirements and timing of when the saver is taxed. If you still aren't sure whether a traditional IRA or Roth IRA is right for you, remember: You might not have to decide. You're allowed to open and contribute to multiple IRAs in the same year, as long as you meet account eligibility requirements and don't exceed the annual contribution limit that applies across traditional and Roth IRAs. For a full breakdown of which might be better for you, visit our IRA comparison guide.

IRA advantages

There are many potential benefits to IRAs, and each type has different ones. Generally, though, all IRAs offer the following pluses:

• Tax benefits: Whether you receive the benefit upfront or in retirement, it's likely you'll save on taxes if you save in an IRA.
• Ample investment choices: You have a wide range of investment choices.
• Some early-withdrawal flexibility: There are typically exceptions that allow you to take your money out before you hit age 59½. Where these withdrawals are tax- and/or penalty-free depends on the type of IRA and the exception that applies in your situation.^{2, 3}
• You can have multiple accounts: You're generally permitted to have and contribute to multiple IRAs in the same year—and you can still have multiple workplace plans in addition to IRAs to help optimize your saving power and tax efficiencies.

IRA disadvantages

Depending on the IRA type, you may also encounter drawbacks:

• Limited access to your money: Because these accounts are intended for retirement, you may be on the hook for a tax penalty, on top of income taxes, if you don't meet certain requirements before you withdraw. Roth IRA contributions are a notable exception.
• Required minimum distributions: With the exception of Roth accounts, you must start taking money out of your IRA at age 73, which you then must pay taxes on.
• Lower contribution limits than workplace savings plans: With traditional and Roth IRAs the annual contribution limit is less than workplace plans, such as 401(k)s and 403(b)s.

Should you open an IRA?

Fidelity estimates that you may need 55% to 80% of your pre-retirement income in retirement. If you even have access to one, an employer-sponsored savings plan, such as a 401(k), might not be enough to accumulate the savings you need because of annual contribution limits. Investing through an IRA, in addition to other tax-advantaged accounts, could help you save more for the future.

How to open an IRA

Ready to open a traditional IRA or Roth IRA? Here's how to do it in 6 steps:

1. Pick where you want the account: Check out a few different firms that offer IRAs. Find out whether they offer helpful support and a user-friendly experience, plus whether they charge any fees or minimums. (Psst … there are no account fees or minimums to open an IRA at Fidelity.⁵)
2. Choose the right type of IRA: Research which type of IRA you're eligible for and which is best for your personal situation. This Roth IRA vs. traditional IRA cheat sheet could help.
3. Fill out an application: You'll need to provide some personal info, like your Social Security number and bank account details, so you can fund your IRA. You may even need a government-issued ID, like a driver's license or passport, to verify your identity. In many cases, like at Fidelity, the application process can be entirely online.
4. Decide how much you want to contribute and how often: Then transfer that money from another account into this account. Consider contributing regularly to maximize your savings. Recurring investments could automate some of your decision making, helping turn investing for retirement into a habit without much effort.
5. Choose your investments: After you've funded your account, it's time to put that money to work and pick investments.
6. Set a check-in schedule: Just because you're invested doesn't mean the job is done. Make sure to check in on your IRA regularly to make sure your investments are aligned with your plan.