An individual retirement account (IRA) is a type of retirement savings plan that invests in financial products such as stocks, bonds or mutual funds. You can open some IRAs, like traditional and Roth IRAs, by yourself. Or your employer can establish a workplace IRA, such as a simplified employee pension (SEP) IRA or a savings incentive match plan for employees (SIMPLE) IRA.
How do IRAs differ?
All IRAs are alike in some ways. For example, an IRA can’t be jointly held; it’s for an individual. However, if you file a joint tax return, you may be able to contribute to your spouse’s IRA even if your spouse has little or no income.
But IRAs do come in a variety of styles to fit the retirement needs of different people. Each type varies in terms of how contributions and withdrawals are made. They are often referred to as “tax-advantaged investment vehicles.” But “tax-advantaged” can mean a couple of different things, depending on the type of IRA.
Some allow tax deductible contributions (the money you put into your IRA on an annual basis). Others allow tax-free distributions (the money you get out of the IRA). Understanding these differences and the limits on these tax advantages can help you decide which type of IRA might be the best fit for you.
With both traditional and Roth IRAs, you are able to contribute a combined $7,500 across these two retirement account types in 2026. If you’re age 50 or older, you can contribute an extra $1,100 to better prepare for retirement.
Traditional IRAs
If you received taxable compensation during the year, you may be eligible to contribute to a traditional IRA. A traditional IRA is a retirement account in which individuals can typically make tax-deductible contributions, subject to income certain conditions.
Three advantages of a traditional IRA
When you’re considering a traditional IRA, be aware of the following advantages:
- Making a contribution can potentially lower your annual taxable income. Traditional IRA contributions may be tax-deductible, meaning these funds may not count toward the income taxes you have to pay for the year. The deduction may be reduced or eliminated if you or your spouse is covered by a retirement plan at work.
- Your investments grow on a tax-deferred basis. Let’s say your IRA, which invests in stocks, bonds and other assets, has a great year. You still don’t pay capital gains taxes on it that year. Similarly, you won’t pay tax in the current year for any dividend income in the account.
- You pay taxes only when you begin to receive distributions. Which could be after you retire, when your income is likely lower. As a result, the tax rate on your IRA payouts may also be lower. Of course, we do not know what tax rates will be in the future.
Roth IRA
A Roth IRA provides tax-free growth on investments. But you can only contribute to a Roth IRA with after-tax dollars. Because you’ve paid taxes on your contribution upfront, you generally don’t pay taxes on the withdrawals you make from your Roth IRA in retirement, as long as at least five years have passed since your first Roth IRA contribution. Your eligibility for this type of IRA is impacted by your income.
And your contribution amount might be limited based on your tax filing status and/or income.
SEP Plan
A simplified employee pension (SEP) plan is a type of IRA that allows business owners to make tax-deductible contributions for their own and their employees’ retirement. If you have a SEP IRA, your employer may contribute to your account, whether or not you contributed anything.
- If you have a SEP IRA through your employer, only your employer can contribute to it—even though you own and control the account.
- You do not pay taxes on the contributions your employer makes.
- You will pay taxes on the withdrawals you take from the account.
SIMPLE IRA
A savings incentive match plan for employees (SIMPLE) IRA can be set up by self-employed individuals and employers with no more than 100 employees who earned $5,000 or more in the prior year. SIMPLE IRAs allow employees to contribute pre-tax dollars to the plan, while requiring the employer to make either matching contributions (up to 3% of compensation) or a flat contribution of 2% of each employee’s compensation.
When can I withdraw from my IRA?
You can start to withdraw your savings penalty-free when you reach age 59 ½. Taking out your savings before that time could cost you an extra 10% on top of what you’d normally pay in state and federal taxes (25% for SIMPLE IRA withdrawals within the first two years of participation).
Once you turn 73 (75 if you were born in 1960 or later), you typically have to withdraw a minimum amount annually to comply with distribution requirements. The exception is Roth IRAs, which never force the original owner to take withdrawals during their lifetime.
When it’s time to start using your savings, be sure to consider the tax implications before making any withdrawals.
