What is an IRA and how does it work?

If you’re thinking about retirement, congratulations! That’s the first step toward financial security in your older years. While your unique circumstances should determine how you invest your money, an individual retirement account (IRA) may be a smart choice for your future.
 
A variety of IRAs are available for retirement planning — each with its own advantages for investors. From traditional to Roth to rollover accounts, learn about the different types of IRAs so you can decide which option is right for you.

What is an IRA?

An IRA is a long-term investment account that helps you save for retirement. It offers tax benefits that help you supercharge your savings.
 
You contribute earned income to your IRA through payroll deductions. Those funds can then be invested in stocks, bonds, mutual funds, exchange traded funds (ETFs), share certificates, or, in some cases, real estate or cryptocurrencies.
 
An IRA comes with a significant upside: it offers tax-free growth and other tax advantages,¹ helping your savings grow more quickly than with other types of retirement accounts. With a brokerage account, for example, you pay income taxes and capital gains taxes on trading activity, which can eat into your retirement nest egg.

Can anyone open an IRA?

IRAs are mostly intended for self-employed people who don’t have access to a workplace retirement plan such as a 401(k). But anyone with earned income can open an IRA. If you work for a company that offers a 401(k), you can contribute to that 401(k) and also open an IRA on your own.
 
You can open an IRA through Patelco, a bank, a brokerage, an investment company, or a credit union.
 

Is a 401(k) an IRA?

No, a 401(k) and an IRA are not the same. Each helps you save for retirement, but they have some key differences.
 
A 401(k) plan is available through your employer. You contribute part of your salary to the plan, and your employer may provide matching contributions.
 
A 401(k) plan:

• allows contributions of up to $24,500 in 2026.
• allows an additional catch-up contribution for older workers. In 2026, those age 50 and older can contribute an extra $8,000 (or $32,500 total) and those age 60, 61, 62, or 63 can contribute an extra $11,250 (or $35,750 total).
• offers more limited investment choices than an IRA.
• charges a penalty If you withdraw funds before age 59½. You’ll pay taxes on the withdrawal and pay a 10% penalty. If you leave your job at age 55 or older, however, you may be able to withdraw funds penalty-free.

 
An IRA is a retirement plan that you set up yourself. You simply need to have earned income.
 
An IRA:

• allows contributions of up to $7,500 in 2026.
• allows an extra catch-up contribution of $1,100 for those age 50 and older, for a total of $8,600.
• may offer diverse investment options including precious metals, real estate, or cryptocurrency.
• may or may not charge a penalty for withdrawing funds before age 59½, depending on the type of IRA.
• limits the contributions of higher-income workers who have a Roth IRA. The contribution limits decrease for single workers who earn at least $153,000, and married individuals who file jointly and earn $242,000 or more. Roth IRA contributions are prohibited for single heads of household who earn $168,000 and married joint filers who earn $252,000.

Types of individual retirement accounts

There are three main types of individual retirement accounts – traditional IRAs, Roth IRAs, and SEP IRAs. They are similar but have some key differences.

Traditional IRA

With a traditional IRA:

• contributions are deducted from your income, and you don’t pay taxes on the money you put into the account; this allows you to reduce your taxable income for the year.
• your money grows tax-free over the years.
• when you withdraw funds in retirement, you pay taxes on those withdrawals.
• you must start withdrawing the required minimum distributions (RMDs) by April 1 of the year after you turn 73 or, if you were born in 1960 or later, April 1 of the year after you turn 75.
• your account is insured by the federal government for up to $250,000 per depositor, per bank or credit union.

Roth IRA

With a Roth IRA:

• contributions are deducted from your income and are taxed, so you receive no immediate tax break.
• your money grows tax-free over time.
• you pay no taxes when you withdraw money in retirement.
• you are not required to take minimum distributions at a particular age. If you die, however, your beneficiaries will be required to do so.
• your account is insured by the federal government just as a traditional IRA would be.

Traditional vs. Roth IRAs

Simplified employee pension or SEP IRA

A SEP IRA is an independent retirement account for self-employed people.
 
With a SEP IRA:

• contributions are tax-deductible and earnings are tax deferred.
• contribution limits are higher than those of a traditional or Roth IRA; in 2026, you can contribute as much as 25% of your income, up to $72,000.
• no catch-up contributions are available for older workers.
• you must begin withdrawing the required minimum distributions (RMDs) by April 1 of the year after you turn 73 or, for those born in 1960 or later, April 1 of the year after you turn 75.
• the funds in your account are insured by the federal government.

Mind the Deadline

April 15 is the deadline for making contributions to your IRA for the plan year. If you continue making contributions after April 15, it can be complicated to fix. You may need to ask your financial advisor for help.

What is a rollover IRA?

If you want to direct funds from an old employer-sponsored IRA to a new IRA, you can send them to a rollover IRA.
 

With a rollover IRA, which is a traditional IRA:

• you avoid paying taxes on transferred funds when you roll them over from your old IRA (until you withdraw money during retirement). You would pay 20% withholding tax if you didn’t roll over the funds. Funds need to be transferred within 60 days of the date you receive the distribution.
• you’ll have more investment options than with a typical employer-sponsored retirement plan.
• the funds in your account are insured by the federal government.

Can you have multiple IRAs?

Yes, you can have multiple IRAs. You may want to open both a traditional IRA and a Roth IRA, to give yourself some flexibility in how your contributions are taxed. Or, if you have a job and also own a business, you could contribute to both your employer’s retirement plan and your own SEP IRA.
 

You can actually have as many IRAs as you’d like. Just keep in mind that your total contributions can’t exceed the contribution limits. So, if you have two IRAs, you can contribute up to $7,500 total (or up to $8,600 total if you’re 50 or older).

Can I withdraw money from an IRA early?

You can, but not without paying a penalty. If you withdraw funds from your IRA before reaching age 59½, you’ll pay a 10% early withdrawal tax in most cases.
 
However, there are several exceptions. You may be able to withdraw funds early, penalty-free:

• to pay for qualified birth or adoption expenses (up to $5,000 per child)
• to pay for health insurance premiums while unemployed
• to pay for qualified educational expenses
• to pay for a personal or family emergency (once a year, up to $10,000 or 50% of your account)
• if you’re a qualified first-time homebuyer (up to $10,000)
• if you become totally and permanently disabled
• if you suffer an economic loss due to a federally declared disaster (up to $22,000)
• if you are a victim of domestic abuse by your spouse or domestic partner (up to $10,000 or 50% of your account’s value, whichever is less)
• if you’re a qualified military reservist called to active duty
• if you’re age 55 and leave the service or age 50 and leave your job as a state or local public safety worker
• if you decide to roll over your funds to another retirement account
• if you’re terminally ill
• if you die (funds will then be distributed to your beneficiaries)

IRA rules can be confusing

Certain IRS rules govern who can contribute to an IRA, so before opening one, make sure you’re eligible. We also recommend that you talk to your tax advisor.