IRA, in plain English

An Individual Retirement Account (IRA) is a retirement savings account you open on your own — not through an employer. Anyone with earned income can contribute, within limits set by the IRS.

If a 401(k) is the account you get because of where you work, an IRA is the account you get because you decided to save. They cover slightly different ground, and most people benefit from having both.

Think of any IRA as the container, not the investment. Opening one and transferring money in is only the first half; you still have to place a buy order (typically a broad-market or target-date index fund) for the cash to be working. An empty IRA, or one left sitting in cash, earns close to nothing.

The five types

There are five common kinds of IRA, each with a different tax treatment and different rules about who can contribute.

Traditional IRA
  • Contributions may be tax-deductible depending on your income and whether you’re covered by a workplace plan — see the Roth vs. Traditional guide for which one fits your situation.
  • Earnings grow tax-deferred.
  • Withdrawals in retirement are taxed as ordinary income (your normal income-tax brackets, same as W-2 wages).

Roth IRA
  • Contributions are made with after-tax dollars (no deduction).
  • Earnings grow tax-free.
  • Qualified withdrawals in retirement (after age 59½ and at least five years from the account’s first contribution) are completely tax-free.
  • Income limits apply — high earners may not be able to contribute directly.

SEP IRA (Simplified Employee Pension)
  • Designed for self-employed people and small business owners.
  • Contributions made by the business, deductible to the business.
  • Much higher contribution limits than a Traditional or Roth.

SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • For small employers (typically under 100 employees) who want to offer a workplace plan without the cost of a 401(k).
  • Both employer and employee contribute.

Rollover IRA
  • A Traditional IRA used to receive funds rolled over from an employer plan (most often a 401(k) when you leave a job).
  • Same tax rules as a Traditional IRA. Kept in its own account so that, if a future job offers a 401(k), you have the option to roll the money in (most plans only accept rollovers from accounts that haven’t been mixed with personal IRA contributions).

2026 contribution limits

IRS · 2026 limits

Annual IRA contribution caps

Traditional / Roth (under 50) $7,500
Traditional / Roth catch-up (50+) +$1,100
SEP IRA (lesser of 25% of net self-employment earnings or the cap) $72,000
SIMPLE IRA (under 50) $17,000
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Roth vs. Traditional, in one sentence

Plain English

Choose Roth if you expect your tax bracket in retirement to be the same or higher than today. Choose Traditional if you expect it to be lower.

Roth IRA income limits

Roth IRAs phase out at higher incomes. For 2026, the contribution starts to phase out at:

Above the upper bound, you can’t contribute directly. Higher earners sometimes work around this through a Traditional-then-convert sequence (a backdoor Roth), but it’s an advanced move — talk to a CPA before trying it.

Withdrawals

  1. Early withdrawals before age 59½ are generally hit with a 10% penalty plus income tax (on Traditional). Some hardship and first-home-buyer exceptions exist.
  2. Roth contributions (not earnings) can always be withdrawn tax- and penalty-free, since you already paid tax on the way in. Earnings are the gated piece: take them before age 59½ or before the account’s five-year clock has run, and they lose tax-free treatment; gains come out as ordinary income, with a 10% penalty if you’re under 59½.
  3. Required Minimum Distributions (RMDs) apply to Traditional IRAs starting at age 73. Roth IRAs have no RMDs during the original owner’s lifetime.

Rolling over a 401(k)

When you leave a job, rolling your old 401(k) into a Rollover IRA gives you broader investment choices and (often) lower fees. The two ways to do it:

  • Direct rollover — your old plan sends the money straight to your new IRA. No taxes withheld, no 60-day clock.
  • Indirect rollover — they cut you a check; you have 60 days to deposit it into the new IRA. 20% gets withheld for tax, which you have to make up out of pocket to roll over the full amount. Example: on a $10,000 balance, the plan withholds $2,000 and hands you $8,000, but to avoid tax and penalty on that withheld $2,000 you have to deposit the full $10,000 into the new IRA, covering the missing $2,000 from other savings. You get the $2,000 back as a refund when you file taxes.

Always do the direct rollover unless you have a very specific reason not to.

Key takeaways

  • Anyone with earned income can open an IRA — no employer required.
  • Traditional vs. Roth comes down to when you’d rather pay the tax.
  • Self-employed? A SEP IRA raises the contribution ceiling dramatically. SIMPLE IRAs are for small employers offering a plan to their workers — if that’s you, look at SIMPLE; if you’re a solo operator, look at SEP or Solo 401(k).
  • Rolling over an old 401(k) into an IRA is usually a good move for fees and flexibility.
Next step

Not sure which IRA fits your situation? Book a free session — bring last year’s tax return if you have it handy.