What is an IRA?
An Individual Retirement Account, commonly called an IRA, is a tax-advantaged account designed to help individuals save and invest for retirement.
Understanding the account itself is important—but what you choose to own inside the IRA can be just as important.
An IRA is an account. It is not an investment.
One of the most important things to understand about an IRA is that the IRA itself is simply the type of account in which investments are held.
Depending on the custodian and investment approach, an IRA may hold stocks, bonds, mutual funds, ETFs, cash, and other eligible investments. The performance and risk of the IRA therefore depend heavily on the investments selected inside the account.
Provides the retirement-account structure and associated tax treatment.
Stocks, bonds, ETFs, funds, cash, and other eligible investments.
An investment portfolio held within a tax-advantaged retirement account.
Why do investors use an IRA?
A Traditional IRA provides a tax-advantaged environment for retirement investing. Investment earnings inside the account generally are not taxed each year as they are earned.
Instead, taxes are generally deferred until money is distributed from the account. Tax treatment can vary when an IRA contains nondeductible contributions, so investors should maintain appropriate tax records.
Tax-Deferred Growth
Interest, dividends, and realized investment gains generally can remain inside the account without creating current annual federal income taxation while they remain in the IRA.
Potential Tax Deduction
Some investors may be able to deduct all or part of an annual Traditional IRA contribution. Deductibility depends on the investor's circumstances, including income and participation in a retirement plan at work.
Long-Term Compounding
Keeping investment earnings inside the retirement account allows those earnings to remain invested rather than being reduced by annual taxation along the way.
Investment Flexibility
IRAs can generally provide access to a broad range of investments, giving investors substantial flexibility in how retirement assets are allocated.
How much can you contribute to an IRA?
Federal law establishes annual limits on new IRA contributions. These limits can change from year to year.
Maximum annual contribution for an eligible individual, subject to taxable compensation.
Includes the additional $1,100 catch-up contribution available for individuals age 50 or older in 2026.
Moving eligible retirement assets into an IRA through a qualifying rollover generally does not use up the annual IRA contribution limit. This is why an IRA can sometimes receive a retirement-plan balance that is significantly larger than the annual contribution limit.
Annual contribution eligibility and deductibility depend on individual circumstances. Contribution limits are periodically adjusted by federal law.
Is an IRA contribution tax deductible?
It can be, but not every Traditional IRA contribution is deductible.
Depending on income, tax-filing status, and whether the investor or spouse participates in a retirement plan at work, a contribution may be fully deductible, partially deductible, or nondeductible.
Fully Deductible
Some eligible investors may be able to deduct the full amount of their qualifying contribution.
Partially Deductible
The available deduction may be reduced when an investor falls within applicable income phase-out ranges.
Nondeductible
An investor may still be able to make a contribution even when a current-year tax deduction is unavailable, subject to applicable contribution rules.
What can an IRA invest in?
Opening an IRA does not automatically create an investment portfolio. The account still needs an investment strategy appropriate for the investor's objectives, time horizon, liquidity needs, and tolerance for risk.
An IRA invested aggressively can experience substantial losses. An IRA held entirely in cash may have very little market risk but could have difficulty keeping pace with inflation over long periods. The account structure and the investment strategy should be considered separately.
When can you take money out of an IRA?
IRA owners can generally request a distribution from their account, but the tax consequences depend on age, the composition of the account, and the reason for the withdrawal.
Early distributions
Taxable amounts withdrawn before age 59½ generally may be subject to ordinary income tax and an additional 10% federal tax unless an applicable exception applies.
Retirement distributions
After age 59½, the federal 10% additional tax for an early distribution generally no longer applies, although taxable distributions generally remain subject to income tax.
Eventually, distributions become required.
Traditional IRA owners generally become subject to Required Minimum Distribution rules later in life. An RMD is the minimum amount federal tax law requires an account owner to withdraw for a particular year.
The applicable starting age depends on the account owner's birth year and current federal law. Because retirement laws can change, investors approaching the required-distribution age should confirm the rules applicable to them at that time.
An IRA can also receive assets from an old retirement plan.
When someone leaves an employer, one possible option may be to move eligible assets from the former employer's retirement plan into an IRA. This is generally referred to as an IRA rollover.
A rollover is not automatically the best choice. Employer-sponsored retirement plans can have valuable features, including institutional investment pricing, creditor protections, withdrawal provisions, or other plan-specific benefits that should be compared before assets are moved.
Learn about 401(k) rollover considerations →Why might an IRA be useful within a retirement strategy?
Retirement Saving
An IRA provides individuals with a dedicated tax-advantaged account for long-term retirement assets.
Investment Flexibility
Depending on the custodian, an IRA may provide significantly more investment flexibility than some employer retirement plans.
Account Consolidation
Some investors use an IRA to consolidate eligible retirement accounts accumulated over multiple employers.
Customized Management
An IRA can be managed as part of a broader investment strategy alongside taxable accounts, trusts, and other household assets.
A few IRA concepts investors sometimes misunderstand.
The IRA itself does not determine the return. The investments held inside the IRA determine investment performance.
Deductibility depends on the investor's individual tax circumstances.
IRA assets can generally be distributed, but taxes and an additional federal tax may apply depending on the circumstances.
A qualifying rollover is generally separate from the annual contribution limit.
Not necessarily. Fees, investments, protections, services, and withdrawal provisions should be compared before moving retirement assets.
Opening the account is only the beginning. Asset allocation, security selection, risk management, costs, and ongoing portfolio management ultimately determine how the assets are invested.
Common questions about IRAs.
What does IRA stand for?
IRA generally refers to an Individual Retirement Arrangement, commonly called an Individual Retirement Account. It is a tax-advantaged arrangement designed for retirement savings.
Is an IRA the same thing as a stock account?
No. An IRA is a type of retirement account. Stocks are one type of investment that may be held inside the account.
Can I own individual stocks in an IRA?
IRAs at many custodians can hold individual stocks in addition to bonds, ETFs, mutual funds, cash, and other eligible investments.
Can I contribute to an IRA if I have a 401(k)?
Participation in a workplace retirement plan does not by itself prevent someone with eligible compensation from contributing to a Traditional IRA. However, workplace-plan participation and income can affect whether the contribution is deductible.
Does an IRA rollover count toward the annual contribution limit?
A qualifying rollover generally does not count toward the annual IRA contribution limit.
Can I lose money in an IRA?
Yes. An IRA does not protect investments from market losses. Investment risk depends on the securities and strategies held within the account.
The IRA is the account. The portfolio inside it is where the work begins.
PortfolioLab builds and manages customized retirement portfolios based on each client's objectives, time horizon, risk tolerance, liquidity needs, and broader financial circumstances.
Request a Portfolio ReviewThis material is provided for general educational and informational purposes only and should not be construed as individualized investment, tax, or legal advice. Tax rules, contribution limits, deduction limits, distribution requirements, and other retirement-account provisions may change. The tax consequences of IRA contributions and distributions depend on individual circumstances. Investors should consult an appropriate tax professional regarding their personal tax situation. Investing involves risk, including the possible loss of principal.