What Is an IRA? A Guide to Individual Retirement Accounts

Last updated Jun 18, 2022 | By Matthew Hill
What Is an IRA? A Guide to Individual Retirement Accounts image

If you're like most people, you probably think of an IRA as just another kind of savings account. But IRAs are much more than that. In fact, they can be one of the best tools for retirement planning. In this blog post, we will discuss what IRAs are and how they can help you save for retirement. We'll also answer some common questions about IRAs, such as: "Can I contribute to an IRA if I already have a 401k?" Keep reading to learn more!

What is an IRA?

An Individual Retirement Account is a type of savings account that offers tax benefits to help you save for retirement. Contributions to an IRA are made with after-tax dollars, which means you won't get a tax deduction for the money you contribute. However, the money in your IRA will grow tax-deferred, meaning you won't have to pay taxes on the interest it earns until you withdraw it in retirement.

There are two main types of IRAs: traditional and Roth. With a traditional IRA, your contributions may be tax-deductible, and your withdrawals in retirement will be taxed as ordinary income. With a Roth IRA, your contributions are not tax-deductible, but your withdrawals in retirement are tax-free. You can open an IRA at most financial institutions, and there are no income limits or age restrictions on who can contribute.

Traditional IRA

Traditional IRA is one of the most popular retirement savings plans. It offers tax-deferred growth and allows you to deduct your contributions from your taxes. You can contribute up to $5,500 per year, or $6,500 if you're over the age of 50. The funds in your traditional IRA can be invested in a wide variety of assets, including stocks, bonds, and mutual funds. When you retire, you can choose to take distributions in a lump sum or in periodic payments. You will pay taxes on the distributions, but they will be taxed at a lower rate than if you had not contributed to a traditional IRA.

Roth IRA

Unlike a traditional IRA, contributions to a Roth IRA are not tax deductible. However, all earnings and withdrawals are tax free, as long as you meet the eligibility requirements. For many people, a Roth IRA is the best choice for retirement savings, because it offers the opportunity for tax-free growth and tax-free withdrawals. When saving for retirement, it is important to consider your future tax liability. With a Roth IRA, you can be sure that your withdrawals will not be taxed in retirement. This can help you keep more of your hard-earned money in your pocket during retirement.


A SEP IRA is a retirement account for small business owners and self-employed individuals. It allows you to contribute up to 25% of your income, up to a maximum of $56,000 per year (as of 2020). The money in your SEP IRA grows tax-deferred, meaning you don't pay taxes on it until you withdraw the money in retirement. With a SEP IRA, you have the flexibility to contribute more in years when your income is higher and less in years when your income is lower. This makes it an ideal retirement savings account for small business owners and self-employed individuals who have variable incomes. When you retire, you can choose to take the money out as a lump sum or as periodic payments. There are no required minimum distributions with a SEP IRA, so you can leave the money in the account to grow tax-deferred for as long as you want.

Simple IRA

Contributions to a Simple IRA are made pre-tax, which reduces your taxable income and allows your money to grow tax-deferred. With a Simple IRA, you can choose to contribute either a fixed percentage of your income or a fixed dollar amount each year. Employers are also required to make contributions to their employees' Simple IRAs, and these contributions can be either matching or non-matching. The main advantage of a Simple IRA is that it is relatively easy to set up and maintain, which makes it an ideal retirement savings solution for small businesses. Another benefit is that your employees can start saving for retirement immediately, without having to wait for an employer-sponsored 401(k) plan.

Is It Better To Have a 401(k) or IRA?

One of the most important decisions you can make when it comes to saving for retirement is whether to invest in a 401(k) or an IRA. Both options have their pros and cons, so it's important to do your research before making a decision. One key difference between the two is that 401(k)s are sponsored by employers, while IRAs are individual accounts. This means that employer matching contributions may be available with a 401(k), but not with an IRA. Additionally, 401(k)s tend to have higher contribution limits than IRAs. However, IRAs offer more flexibility when it comes to withdrawal options and may be a better choice for those who are self-employed or don't have access to a 401(k). Ultimately, the best option for you will depend on your unique circumstances. Talk to a financial advisor to get started.