About one in three Americans has no retirement savings at all, according to federal survey data. If you are among them, or just getting started, an individual retirement account (IRA) is one of the simplest tools you can use to close that gap.
An IRA is a tax-advantaged account you open on your own, separate from any employer. You put money in, invest it, and let it grow over time. The tax benefits depend on which type of IRA you choose.
Why an IRA Matters
Social Security replaces only about 40% of pre-retirement income for the average worker. Most financial planners suggest you will need 70-90% to maintain your lifestyle. An IRA helps bridge the difference.
The compounding effect inside a tax-advantaged account is significant. Money that would otherwise go to taxes each year stays invested and keeps growing. Over 30 years, that difference adds up to tens of thousands of dollars.
Anyone with earned income can open an IRA. You do not need an employer to sponsor it. That makes it especially useful for freelancers, gig workers, and people between jobs.
Types of IRAs
Traditional IRA
Contributions to a Traditional IRA may be tax-deductible, depending on your income and whether you have a workplace retirement plan. The money grows tax-deferred. You pay ordinary income tax when you withdraw funds in retirement. Required minimum distributions (RMDs) begin at age 73. For a full breakdown of how this account type works, see our Traditional IRA guide.
Roth IRA
A Roth IRA works the opposite way. You contribute after-tax dollars now, so you get no upfront deduction. But qualified withdrawals in retirement are completely tax-free, including the growth. There are no RMDs during your lifetime. Income limits apply: for 2026, single filers earning above $161,000 and joint filers above $240,000 face reduced or no eligibility. For more detail on eligibility rules, see IRA income limits 2026.
SEP IRA
A Simplified Employee Pension (SEP) IRA is designed for self-employed people and small business owners. Contribution limits are much higher: up to 25% of net self-employment income, with a maximum of $70,000 in 2026. Contributions are tax-deductible. Withdrawals are taxed as ordinary income.
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is offered by small employers with 100 or fewer workers. Employees can contribute up to $16,500 in 2026. Employers are required to either match contributions up to 3% of salary or make a flat 2% contribution for all eligible employees. Early withdrawal penalties are steeper than other IRA types during the first two years.
2026 Contribution Limits
For Traditional and Roth IRAs, the contribution limit for 2026 is $7,000 per year. If you are 50 or older, you can contribute an extra $1,000 as a catch-up contribution, bringing the total to $8,000.
These limits apply across all of your Traditional and Roth IRAs combined, not per account. You cannot contribute more than your earned income for the year. The IRS also sets deadlines for contributions, which are covered in this guide on IRS retirement account deadlines.
Tax Treatment at a Glance
| IRA Type | Contribution | Growth | Withdrawal |
|---|---|---|---|
| Traditional | Pre-tax (may deduct) | Tax-deferred | Taxed |
| Roth | After-tax | Tax-free | Tax-free |
| SEP | Pre-tax (deductible) | Tax-deferred | Taxed |
| SIMPLE | Pre-tax | Tax-deferred | Taxed |
Choosing between Traditional and Roth often comes down to whether you expect to be in a higher or lower tax bracket in retirement. A closer look at pre-tax vs Roth retirement contributions can help you decide which direction fits your tax situation. If you expect higher taxes later, Roth usually makes more sense. If you want the deduction now, Traditional may be better.
What You Can Invest in Inside an IRA
An IRA is an account type, not an investment itself. Once funded, you can invest the money in a wide range of assets, including:
- Individual stocks
- Exchange-traded funds (ETFs)
- Mutual funds
- Bonds
- Certificates of deposit (CDs)
Most investment platforms offer broad asset selection inside an IRA. Index funds and ETFs tracking the S&P 500 or total stock market are popular choices for their low costs and diversification.
How to Open an IRA
Opening an IRA takes about 15 minutes online. Here is what the process typically looks like:
Step 1: Choose your IRA type. Decide between Traditional or Roth based on your tax situation and income.
Step 2: Pick a platform. You can open an IRA at a brokerage, bank, robo-advisor, or investment app. Look for low or no account fees and a good selection of investments. A step-by-step walkthrough is available in our guide on how to open an IRA.
Step 3: Fund the account. Link a bank account and make a contribution. You can contribute a lump sum or set up automatic monthly transfers.
Step 4: Choose your investments. Select the funds or stocks you want to hold. Many beginners start with a low-cost S&P 500 index fund or a target-date fund that automatically adjusts as you approach retirement.
Getting Started
One platform worth considering for opening an IRA is Robinhood, which offers Robinhood Retirement with matching contributions on IRA deposits. Robinhood matches 1% on every dollar you contribute to a traditional or Roth IRA, with no employer required. The app offers commission-free trading on stocks and ETFs, making it easy to build a diversified retirement portfolio with no trading costs eating into your returns.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Consider your risk tolerance and time horizon before investing.
Robinhood
Robinhood
Robinhood is a trading platform that brings stocks, ETFs, options, futures, prediction markets, crypto, and retirement accounts together in one app.
Standout feature
One platform for stocks, ETFs, options, futures, prediction markets, and crypto
Fees
$0 commission on stocks, ETFs, and options.
Pros
Zero-commission trading on stocks, ETFs, and options
Cons
Best perks (high APY, lower margin rates) require Gold subscription ($5/month)
The best time to open an IRA is as early as possible. Even small contributions made in your 20s or 30s have decades to compound. If you start at 25 and contribute $500 a month until age 65, assuming a 7% average annual return, you would accumulate over $1.3 million.
Contributions for a given tax year can be made up until the tax filing deadline, usually April 15 of the following year. That gives you extra time if you need it.
If you are self-employed and looking for higher contribution limits, a SEP IRA may be a better fit than a Traditional or Roth. You can run the numbers based on your net self-employment income to find out how much you could shelter from taxes each year.
Frequently Asked Questions
What is the difference between a Traditional IRA and a Roth IRA?
The main difference is when you pay taxes. With a Traditional IRA, you may deduct contributions now and pay taxes on withdrawals in retirement. With a Roth IRA, you contribute after-tax dollars and qualified withdrawals are tax-free. For a full side-by-side comparison, see Roth vs Traditional IRA. Roth IRAs also have no required minimum distributions during your lifetime, which can be useful for estate planning.
Can I have both a Traditional IRA and a Roth IRA?
Yes. You can contribute to both in the same year as long as your total contributions across all IRAs do not exceed the annual limit, which is $7,000 for 2026 ($8,000 if you are 50 or older). Having both can give you flexibility in managing your tax situation in retirement.
What happens if I withdraw money from an IRA early?
If you withdraw money from a Traditional IRA before age 59.5, you generally owe income tax plus a 10% early withdrawal penalty. Roth IRA contributions (not earnings) can be withdrawn at any time without penalty since you already paid tax on them. SIMPLE IRAs have a 25% penalty if you withdraw within the first two years of participation.
How much should I contribute to an IRA each year?
Financial planners generally suggest contributing as much as you can up to the annual limit. If you cannot max out immediately, even small, consistent contributions help. A common starting point is contributing enough to take advantage of any employer match in your workplace plan first, then funding an IRA with whatever is left.
