How does an IRA work?

Learn how IRAs work, including IRA tax advantages and other IRA benefits, and understand the difference between an IRA and 401(k), with our at-a-glance guide to individual retirement accounts.

One of the most popular—and useful—tools you can use for retirement savings is an individual retirement account (IRA).

Think of an IRA as a bucket that you can fill with stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investment vehicles.

The investments in your IRA bucket provide tax advantages that regular investments don’t offer. Even better, the money you invest in an IRA is compounded tax-free year over year, helping your nest egg grow over time.

Here are some common questions about how an IRA works and whether it could be a good option for you as you save for retirement.

Traditional IRA vs Roth IRA: Which should I choose?

It depends on your goals. The biggest difference between traditional IRAs and Roth IRAs is how they’re taxed. There are also differences related to withdrawals and required distributions. 

• Roth IRA: “Tax-free.” You invest after-tax dollars in a Roth IRA, but when you withdraw money after retirement, you’re not taxed on it. Roth IRAs can be useful if you’re a younger investor and are in a lower tax bracket than you expect to be as you progress in your career.
• Traditional IRA: “Tax-deferred.” You can receive a tax deduction on the money you contribute to your traditional IRA each year.* Then, when you withdraw the money in retirement, it will be taxed as ordinary income. It’s worth noting that you won’t pay taxes on your untaxed earnings or contributions until you start taking required minimum distributions—currently, when you turn 73.

Learn more about different types of IRA accounts.

When can I open an IRA, and how much can I contribute to an IRA?

If you open an IRA before April 15, you can deduct your contribution on the filing year’s taxes. This can reduce your taxable income for that year.*

The amount of money that you contribute to an IRA before April 15 counts toward the prior year’s limit ($7,000 for tax year 2024). For example, if you open a new IRA in January, you could jumpstart your investment by contributing $7,000 before April 15 and then another $7,000 (or whatever the current limit) before April 15 of the following year. 

Should I choose an IRA, a 401(k) or both?

Many people have both an IRA and a 401(k), because they both will help toward their retirement goals. Here’s a look at the requirements and benefits of each. 

How do I manage an IRA?