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Explore IRA retirement accounts. Discover types, benefits, and learn how to secure your financial future with IRAs.

Individual Retirement Account (IRA): Overview & Types

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

An IRA is a personal retirement savings plan that provides tax benefits, making it an excellent choice for individuals looking to build a nest egg. Unlike employer-sponsored plans like a 401(k), you open and manage an IRA retirement account independently, giving you more control over your investment choices.

This flexibility is one of the key reasons why an IRA is a popular choice for many, either as a primary retirement vehicle or to complement other savings plans. The goal of an IRA retirement strategy is to leverage tax benefits to maximize your wealth accumulation over time.

There are several main types of IRA retirement accounts, each with unique characteristics and tax implications, designed to suit different financial situations and goals. Let's explore the most common ones to help you navigate the landscape of IRA retirement planning.

Traditional IRA: Retirement Savings Standard

The traditional IRA is perhaps the most well-known type of IRA retirement account. Its primary advantage lies in the potential for tax-deductible contributions. This means that the money you contribute to a traditional IRA may reduce your taxable income in the year you contribute, offering an immediate tax break.

The earnings within the traditional IRA then grow on a tax-deferred basis, meaning you won't pay taxes on those gains until you withdraw the money in retirement.

This tax deferral can be a significant benefit, allowing your investments to compound over many years without being reduced by annual taxes. When you eventually take distributions in retirement, those withdrawals will be taxed as ordinary income.

A traditional IRA is often a good choice if you anticipate being in a lower tax bracket in retirement than you are today, as you would pay taxes at a potentially lower rate in the future. There are income limitations that may affect whether your contributions are deductible, especially if you or your spouse are covered by a workplace retirement plan.

For 2025, the maximum you can contribute to an IRA retirement account (including both traditional and Roth IRAs combined) is $7,000, with an additional $1,000 catch-up contribution allowed for those age 50 and older.

Roth IRA: Tax-Free Growth for Retirement

In contrast to the traditional IRA, the Roth IRA offers a different but equally compelling tax benefit. Contributions to a Roth IRA are made with after-tax dollars, meaning you don't receive an upfront tax deduction.

However, the remarkable advantage of a Roth IRA is that your qualified withdrawals in retirement, including all earnings, are completely tax-free. This can be incredibly powerful, especially if you expect to be in a higher tax bracket in retirement than you are currently.

Imagine all the growth your investments achieve over decades, and then being able to access that money tax-free when you need it most. This makes the Roth IRA particularly attractive for younger individuals who have many years for their investments to grow, or for those who anticipate their income and tax bracket increasing in the future.

It’s important to note that there are income limitations for contributing to a Roth IRA, which can affect your eligibility for making direct contributions. The same annual contribution limits apply to the Roth IRA as to the traditional IRA: $7,000 for 2025, plus the $1,000 catch-up contribution for those age 50 and above.

SEP IRA: Self-Employed and Small Businesses

The Simplified Employee Pension, or SEP IRA, is specifically designed for self-employed individuals and small business owners. It provides a way for employers to contribute to their own retirement and their employees' retirement with relatively high contribution limits.

Contributions to a SEP IRA are generally tax-deductible for the employer, and the money grows tax-deferred, similar to a traditional IRA.

A key feature of the SEP IRA is its simplicity, as it avoids many of the complex administrative requirements of other employer-sponsored plans. For 2025, the contribution limit for a SEP IRA is the lesser of 25% of an employee's compensation or $70,000.

If you are a business owner or self-employed, exploring a SEP IRA retirement plan could offer significant tax advantages and help you build substantial retirement savings.

Updated May 27th, 2025

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SIMPLE IRA: Another Option for Small Businesses

The Savings Incentive Match Plan for Employees, or SIMPLE IRA, is another retirement plan option for small businesses with generally 100 or fewer employees. It's often seen as a good middle ground between a traditional IRA and a more complex 401(k). Both employees and employers can contribute to a SIMPLE IRA.

Employees can make elective deferral contributions, and employers are required to make either a matching contribution or a non-elective contribution.

Like the SEP IRA, contributions to a SIMPLE IRA are generally tax-deductible, and earnings grow tax-deferred. For 2025, employee contribution limits for a SIMPLE IRA are $16,500, with a catch-up contribution of $3,500 for those age 50 or older.

The SIMPLE IRA offers a straightforward way for small businesses to provide retirement benefits to their employees, fostering a culture of long-term financial security.

Rollover IRA: Consolidating Retirement Savings

A rollover IRA isn't a separate type of IRA in the same way traditional or Roth IRAs are, but rather a mechanism to move funds from a previous employer-sponsored retirement plan, such as a 401(k), into an IRA retirement account.

This can be a strategic move when you change jobs, allowing you to maintain control over your retirement funds and potentially expand your investment options.

Consolidating old 401(k) accounts into a rollover IRA can simplify your financial life, making it easier to track your retirement savings.

You can roll over funds into either a traditional IRA or, in some cases, a Roth IRA (which might involve paying taxes on the rolled-over amount). This flexibility ensures that your IRA retirement strategy remains adaptable to your career changes.

Key Takeaways

Selecting the right IRA retirement account depends on your individual circumstances, including your current income, your expected income in retirement, and your tax situation. There's no single "best" IRA; rather, there's the best IRA for your unique financial goals.

Consider whether you prefer a tax deduction now (traditional IRA) or tax-free withdrawals later (Roth IRA). If you are self-employed or a small business owner, a SEP IRA or SIMPLE IRA might be more suitable.

Regardless of the type, opening an IRA retirement account is a powerful step towards securing your financial future. These accounts offer valuable tax advantages and a wide range of investment choices, from stocks and bonds to mutual funds and exchange-traded funds (ETFs), allowing you to tailor your portfolio to your risk tolerance and long-term objectives.

Starting early and contributing consistently are key principles that will help your IRA retirement savings grow substantially over time, providing you with peace of mind as you approach your retirement years. Consult with a qualified financial advisor to discuss your specific needs and determine the most effective IRA retirement strategy for you.

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By Jordan McCaleb, Investment Researcher