IRA (Individual Retirement Account)

Quick Definition

An Individual Retirement Account (IRA) is a personal, tax-advantaged investment account that anyone with earned income can open independently of their employer. IRAs are among the most flexible and widely used retirement savings tools in the United States, available through banks, brokerages, and mutual fund companies.

What It Means

While 401(k) and 403(b) plans are tied to employment, an IRA belongs entirely to you. You open it yourself, you choose the brokerage, and you select your investments from virtually the entire universe of stocks, bonds, ETFs, and mutual funds. When you change jobs, retire, or simply want more control, the IRA is your independent retirement savings vehicle.

The IRS created IRAs in 1974 as part of the Employee Retirement Income Security Act (ERISA). The original purpose was to give workers without employer-sponsored pension plans a way to save for retirement with tax advantages. Today, IRAs are used both as primary savings vehicles and as rollover destinations for 401(k) balances from former employers.

2026 Contribution Limits

The IRS announced 2026 retirement plan cost-of-living adjustments in Notice 2025-67 (October 2025). For the first time, the IRA catch-up contribution is inflation-indexed under SECURE 2.0.

The $1,100 catch-up is the first increase since the catch-up was introduced in 2002. SECURE 2.0 Act section 108 indexed it for inflation, so future increases will arrive in $100 increments. The limit applies across all your IRAs combined: you cannot contribute $7,500 to a traditional IRA and another $7,500 to a Roth IRA.

Types of IRAs

Traditional IRA: How It Works

The Deductibility Question

A traditional IRA contribution may or may not be tax-deductible depending on whether you are also covered by a workplace retirement plan and your income level.

If you cannot deduct your traditional IRA contribution, you may be better off contributing to a Roth IRA instead (if income-eligible) or using a taxable brokerage account.

Non-Deductible Traditional IRA and the Backdoor Roth

If your income is too high for a deductible traditional IRA and too high for a direct Roth IRA contribution, you can use the Backdoor Roth IRA strategy:

1. Contribute to a traditional IRA (non-deductible, no income limit)
2. Convert the traditional IRA to a Roth IRA
3. Pay income tax on any pre-tax amounts converted (if starting fresh with no other traditional IRA funds, this is typically minimal)

This effectively lets high-income earners access Roth IRA benefits despite exceeding the direct contribution income limits. Be aware of the pro-rata rule: if you have other pre-tax traditional IRA funds, the conversion is taxed proportionally across all your traditional IRA balances.

Roth IRA Income Limits for 2026

Your ability to contribute to a Roth IRA depends on your Modified Adjusted Gross Income (MAGI) and filing status:

Source: IRS Notice 2025-67, IRS press release on 2026 retirement plan limits.

Roth IRA vs. Traditional IRA: The Core Decision

Investment Options: The IRA Advantage Over a 401(k)

One of the most valuable features of an IRA is the virtually unlimited investment menu. Compare this to a typical 401(k):

An IRA at Fidelity, Vanguard, or Schwab gives you access to the lowest-cost index funds available, often with expense ratios of 0.03-0.05%, significantly cheaper than many 401(k) fund options.

Contribution Rules

• Earned income requirement: You must have earned income (wages, salaries, self-employment income, alimony) to contribute. Investment income and Social Security do not count.
• Spousal IRA: A non-working spouse can contribute to their own IRA as long as the working spouse has sufficient earned income to cover both contributions.
• Contribution deadline: You have until the tax filing deadline (typically April 15) to make IRA contributions for the prior tax year. You can contribute for 2025 up until April 15, 2026.
• Age limit: There is no longer an age limit for traditional IRA contributions (removed by the SECURE Act in 2020).

Required Minimum Distributions (RMDs)

Traditional IRAs require minimum withdrawals beginning at age 73 under current law. The RMD amount is calculated by dividing the account balance (as of December 31 of the prior year) by a life expectancy factor from IRS Publication 590-B.

Example RMD calculation:

• Account balance at Dec 31: $500,000
• IRS life expectancy factor (age 73): 26.5
• RMD = $500,000 / 26.5 = $18,868

Failing to take your full RMD triggers a 25% excise tax on the amount not withdrawn (reduced to 10% if corrected within two years).

Roth IRAs have no RMDs during the account owner's lifetime, making them powerful estate planning tools.

Real-World Example: IRA Millionaire Calculation

Scenario: Sarah, age 25, opens a Roth IRA and contributes $7,500/year (the 2026 limit). She invests in a total market index fund earning 8% average annual return. She never increases contributions beyond the current limit.

At retirement, Sarah has $1.92 million in a completely tax-free account. Every dollar of that growth is available to spend without federal income tax.

IRA Rollovers: Moving Money from an Employer Plan

When you leave a job, you can roll your 401(k) or 403(b) balance into an IRA. This is one of the most common and impactful IRA transactions:

Always use a direct rollover to avoid the mandatory 20% withholding and the risk of accidentally triggering taxes.

SECURE 2.0 Changes Affecting IRAs

The SECURE 2.0 Act of 2022 introduced several changes now in effect for 2026:

• Catch-up contributions indexed for inflation: The $1,100 catch-up for 2026 is the first inflation adjustment since the catch-up was created in 2002. Future increases will come in $100 increments.
• Roth catch-up mandate for high earners: If you earned more than $150,000 in the prior year (indexed from $145,000 in 2025), your catch-up contributions to employer plans must be designated as Roth. This does not affect IRA catch-ups directly, but it matters if you also participate in a 401(k).
• Starter IRA: SECURE 2.0 created a starter 401(k) and starter 403(b) with a $6,000 deferral limit ($7,100 with catch-up). This is designed for employers who want a simple auto-IRA or 401(k) setup without the full administrative burden.

Key Points to Remember

• The 2026 contribution limit is $7,500, or $8,600 if age 50 or older. The catch-up rose to $1,100, its first increase since 2002.
• The Roth IRA's tax-free growth is most valuable for younger, lower-bracket investors
• Traditional IRA deductibility phases out for high earners who have workplace plans (starting at $81,000 single / $129,000 MFJ in 2026)
• IRAs offer much broader investment choice than most employer plans
• Backdoor Roth is a legal strategy for high earners to access Roth benefits
• The contribution deadline is April 15 of the following year (giving you 15+ months to contribute for any given tax year)
• Roth IRAs have no RMDs, making them excellent for wealth transfer to heirs

Common Mistakes to Avoid

• Contributing more than the annual limit: Excess contributions incur a 6% excise tax per year until corrected. The $7,500 limit applies across all your IRAs combined, not per account.
• Not naming a beneficiary: Without a designated beneficiary, your IRA goes through probate, which is slower and more expensive.
• Taking non-qualified Roth distributions: Withdrawing Roth earnings before age 59.5 or before the five-year rule is met triggers taxes and penalties. Contributions can always be withdrawn tax-free, but earnings have restrictions.
• Forgetting the spousal IRA: Non-working spouses often miss out on IRA contributions they are fully entitled to make. As long as the working spouse has sufficient earned income, both spouses can contribute $7,500 each in 2026.
• Funding the IRA but not investing the cash: Many people contribute to an IRA and leave the money in the settlement account (cash). The tax advantage only helps if you actually invest the funds. This is one of the most common and costly mistakes: the account is open, the contribution is made, but the money sits uninvested earning near-zero interest.

Frequently Asked Questions

Q: Can I have both an IRA and a 401(k)? A: Yes. You can contribute to both in the same year. The 401(k) limit ($24,500 in 2026) and IRA limit ($7,500 in 2026) are separate. Having a 401(k) at work does affect traditional IRA deductibility if your income exceeds the phase-out ranges.

Q: What is the five-year rule for Roth IRAs? A: To take tax-free qualified distributions from a Roth IRA, the account must have been open for at least five years and you must be at least 59.5. The five-year clock starts on January 1 of the first tax year for which you made a Roth IRA contribution.

Q: Can I contribute to an IRA at any age? A: Yes. Since 2020, there is no age limit for traditional IRA contributions. You just need earned income. Roth IRA contributions also have no age limit.

Q: What investments should I put in an IRA? A: A low-cost total market index fund (like Vanguard's VTI or Fidelity's FZROX) is a solid core holding. Tax-inefficient assets like bonds or REITs are especially good in tax-advantaged accounts because the tax deferral shields the income from annual taxation.