What is an Individual Retirement Account?

As the name implies, an individual retirement account (IRA) is an account that can help you save and invest for your retirement. Even if you already have a 401(k) or other retirement account, an IRA could help supplement your golden years. There are four main types of IRA accounts, each with its own features.
Traditional IRA
- Contributions may be tax-deductible.
- Earnings may grow tax-deferred until you withdraw funds upon retirement. This can be a pro or con depending on your tax bracket now and when you retire.
Roth IRA
- Contributions are made with after-tax money (you've already paid taxes on it).
- As a result, your money may grow tax-free. You may also have tax-free withdrawals in retirement under certain conditions.
SEP IRA
- Specifically for self-employed individuals (independent contractors, freelancers, and small-business owners).
- Adheres to the same tax rules for withdrawals as a traditional IRA.
- Business owners can set up SEP IRAs for their employees and can deduct the contributions they make on behalf of employees.
- Employees can’t contribute to their own accounts, and the IRS taxes withdrawals as income.
Contribution Limit for Traditional, Roth and SEP IRAs
The IRA contribution limit for 2023 – whether you have one, two or all three IRAs – is $6,500 for those under age 50, and $7,500 for those age 50 or older.
You can learn more about these IRAs at investopedia.com.
What about a Simple IRA
A Simple IRA is an employer-sponsored plan, which means it is offered to employees through small businesses with 100 or fewer employees. A Simple IRA follows the same tax rules for withdrawals as a traditional IRA. Unlike SEP IRAs, employees can contribute to their accounts, and the employer must contribute, too. All contributions are tax-deductible.
You can learn more about Simple IRAs from the IRS.
Should you invest in an IRA?
According to some financial experts, retirees may need up to 85% of pre-retirement income in retirement. A 401(k) alone might not get you there. That’s why an IRA may be a good option, plus an IRA can help you gain access to a wider range of investment options than employer-sponsored plans.
As with all investment decisions, consult your financial advisor before investing.