An account, not an investment
An individual retirement account, or IRA, is a container you open at a brokerage, bank or fund company. Think of it as a labeled folder with special tax treatment. What you put in the folder (stocks, ETFs, bonds, mutual funds, even cash) is your choice.
Many people open an IRA and then leave the money sitting in cash by mistake. Opening the account and choosing investments are two separate steps.
The two main types
In the United States the two most common versions are the traditional IRA and the Roth IRA:
- Traditional IRA. Contributions may be tax-deductible, money grows without yearly tax, and withdrawals in retirement are taxed as ordinary income.
- Roth IRA. You contribute money you have already paid tax on. Growth and qualified withdrawals in retirement are tax-free.
Other IRA flavors
There are also rollover IRAs, which hold money moved from an old employer plan such as a 401(k), and SEP and SIMPLE IRAs, which are set up by self-employed people and small businesses.
Rules to know
- Annual limit. The IRS caps how much you can contribute each year across your IRAs, with a higher limit for older savers. The number changes, so look up the current one.
- Earned income. You generally need income from work to contribute.
- Early withdrawals. Taking money out before about age 59½ usually triggers a penalty plus tax, with some exceptions.
- Required withdrawals. Traditional IRAs require you to start taking money out in your 70s. Roth IRAs do not require this for the original owner.
- Income limits. High earners may lose the Roth contribution or the traditional deduction. Details are on irs.gov.
What to hold inside
Because the account shields growth from yearly tax, it suits long-term holdings. A simple approach many people use is a low-cost index fund or target-date fund, but the right mix depends on your goals and risk tolerance.
Quick answers
Can I have an IRA and a 401(k)?
Yes. They are separate accounts with separate limits, though having a workplace plan can affect whether your traditional IRA contribution is deductible.
Where do I open an IRA?
At most brokerages, banks and fund companies. Compare fees, investment choices and account minimums. Investz does not recommend a provider.