An Individual Retirement Account (IRA) is one of the most powerful tools available for building wealth for retirement. Whether you are just starting your career or looking to maximize your retirement savings, understanding how IRAs work is essential. In this guide, we will cover everything you need to know about IRA investing.
What is an IRA?
An IRA is a tax-advantaged investment account designed specifically for retirement savings. The government created IRAs to encourage people to save for retirement by offering significant tax benefits. Unlike a regular brokerage account where you pay taxes on your investment gains each year, an IRA allows your money to grow either tax-free or tax-deferred.
The simple version: An IRA is like a special container for your investments that gives you tax breaks. You put money in, invest it, and the government rewards you with tax benefits for saving for retirement.
Types of IRAs
There are several types of IRAs, each with its own rules and benefits. The two most common types are:
1. Traditional IRA
With a Traditional IRA, you may be able to deduct your contributions from your taxable income. Your investments grow tax-deferred, meaning you do not pay taxes until you withdraw the money in retirement. This is ideal if you expect to be in a lower tax bracket when you retire.
2. Roth IRA
With a Roth IRA, you contribute money that has already been taxed. However, your investments grow completely tax-free, and you pay no taxes on withdrawals in retirement. This is ideal if you expect to be in a higher tax bracket when you retire.
Example: Traditional vs Roth IRA
Sarah earns $60,000 per year and contributes $7,000 to an IRA.
- Traditional IRA: Sarah may deduct $7,000 from her taxable income, reducing her taxes now. She will pay taxes when she withdraws the money in retirement.
- Roth IRA: Sarah pays taxes on the $7,000 now. Her money grows tax-free, and she pays nothing when she withdraws in retirement.
IRA Contribution Limits for 2026
The IRS sets annual limits on how much you can contribute to an IRA:
- Under age 50: $7,000 per year
- Age 50 and older: $8,000 per year (includes $1,000 catch-up contribution)
These limits apply to your total IRA contributions. If you have both a Traditional and Roth IRA, the combined contributions cannot exceed the annual limit.
Who Can Contribute to an IRA?
To contribute to an IRA, you must have earned income. This includes:
- Wages and salaries from a job
- Self-employment income
- Commissions and bonuses
- Alimony (in some cases)
For Roth IRAs, there are also income limits. In 2026, single filers earning more than $161,000 and married couples earning more than $240,000 may not be able to contribute directly to a Roth IRA.
What Can You Invest in With an IRA?
An IRA is not an investment itself but a container that holds investments. Inside your IRA, you can invest in:
- Stocks: Individual company shares
- Bonds: Government and corporate debt securities
- Mutual funds: Professionally managed investment pools
- ETFs: Exchange-traded funds that track indexes or sectors
- Index funds: Low-cost funds that track market indexes
- Target-date funds: Funds that automatically adjust as you approach retirement
Example: Building a Simple IRA Portfolio
A beginner investor might create a simple three-fund portfolio:
- 60% US Total Stock Market Index Fund
- 30% International Stock Market Index Fund
- 10% Bond Index Fund
This provides broad diversification at a low cost.
How to Open an IRA
Opening an IRA is straightforward. Follow these steps:
- Choose a brokerage: Popular options include Fidelity, Vanguard, Charles Schwab, and many others
- Decide on IRA type: Traditional or Roth based on your tax situation
- Complete the application: Provide personal information, Social Security number, and employment details
- Fund your account: Transfer money from your bank account
- Choose your investments: Select stocks, funds, or other investments
IRA Withdrawal Rules
Understanding withdrawal rules is crucial to avoid penalties:
- Age 59 1/2: You can withdraw without penalty after reaching this age
- Early withdrawal penalty: Withdrawing before 59 1/2 typically incurs a 10% penalty plus taxes
- Required Minimum Distributions (RMDs): Traditional IRAs require withdrawals starting at age 73
- Roth IRA exception: You can withdraw your contributions (not earnings) from a Roth IRA at any time without penalty
Benefits of IRA Investing
- Tax advantages: Either tax-deductible contributions or tax-free growth
- Compound growth: Your investments can grow significantly over time
- Investment flexibility: Wide range of investment options
- Control: You manage your own investments
- Portability: You can move your IRA between providers
Common IRA Mistakes to Avoid
- Not contributing early: The earlier you start, the more time your money has to grow
- Forgetting to invest: Money in an IRA earns nothing until you actually invest it
- Paying high fees: Choose low-cost index funds to maximize returns
- Early withdrawals: Avoid the 10% penalty by leaving money in until retirement
- Not maxing out contributions: Try to contribute the maximum allowed each year
Track Your IRA Performance
Pro Trader Dashboard helps you monitor all your investment accounts, including IRAs. See your portfolio allocation, track performance, and analyze your retirement savings progress.
Summary
An IRA is one of the best tools for building retirement wealth thanks to its tax advantages. Whether you choose a Traditional or Roth IRA depends on your current tax situation and expectations for the future. The most important thing is to start contributing as early as possible and invest consistently over time.
Ready to learn more? Check out our detailed guides on Roth IRAs and Traditional IRAs to decide which is right for you.