What Is An IRA?
An Individual Retirement Account (IRA) is a tax-advantaged account designed to help individuals in the U.S. build wealth for retirement. You can contribute earned income to the account and invest in various assets—like mutual funds, ETFs, stocks, annuities, or bonds—where growth is either tax-deferred (Traditional IRA) or tax-free (Roth IRA).
But an IRA isn’t just a savings account—it’s a powerful financial tool. You can use it to reduce your tax bill, maximize growth, or guarantee income for life with an annuity. The type of IRA and how you invest inside it can determine whether you thrive or struggle in retirement.
How Does an IRA Work?
You contribute income into your IRA up to IRS-set limits. Depending on the type, your contributions may be tax-deductible, and your investments grow either tax-deferred or tax-free. IRAs are self-directed—you choose how the funds are invested.
You can open an IRA at:
- A brokerage or bank (to invest in securities)
- An insurance company (to invest in annuities)
Withdrawals are allowed penalty-free after age 59½. Traditional IRAs require minimum withdrawals starting at age 73.
Rules Every IRA Account Holder Should Know
- Contribution Limits: The IRS sets annual limits on how much you can contribute.
- Tax Advantages: Traditional IRAs offer tax-deferred growth, meaning you pay taxes upon withdrawal. Roth IRAs provide tax-free growth, with contributions made with after-tax dollars.
- Withdrawal Rules: In most cases, withdrawals can be made after age 59½ without penalty, but traditional IRAs require mandatory withdrawals at age 73.
Compare IRA Types
Traditional IRA
A tax-advantaged retirement account that allows you to make pre-tax contributions, reducing your taxable income for the year you contribute. Taxes on earnings are deferred until withdrawals, which are taxed as ordinary income. Withdrawals prior to age 59½ may incur a 10% penalty unless an exception applies.
Roth IRA
This account features post-tax contributions, meaning you pay taxes on the money going in, but withdrawals of both contributions and earnings are tax-free in retirement, provided certain conditions are met. There are income limits for eligibility to contribute.
SEP IRA (Simplified Employee Pension)
Designed for self-employed individuals and small business owners. Contributions are made by the employer only and are tax-deductible as a business expense. Employees do not contribute to this account.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Aimed at small businesses that do not have any other retirement plan. Both employers and employees can contribute with mandatory employer contributions. It has higher contribution limits than traditional and Roth IRAs but lower than those for SEP IRAs.
Self-Directed IRA
A variation of a Traditional or Roth IRA that allows for a broader range of investments, including real estate, precious metals, and private placements. Requires a custodian that permits these types of investments. It involves higher risk and potentially higher fees.
Spousal IRA
This is not a distinct type of IRA but a strategy for a non-working spouse to contribute to an IRA (either Traditional or Roth, depending on eligibility). The working spouse’s income must cover the contributions made to both IRAs.
Stretch IRA
A stretch IRA was a strategy allowing beneficiaries to extend required minimum distributions from an inherited IRA over their lifetimes, maximizing tax-deferred growth. The SECURE Act of 2019 largely ended this by requiring most beneficiaries to withdraw inherited funds within 10 years.
Inherited IRA
Also known as a Beneficiary IRA, this is an account opened when you inherit an IRA or employer-sponsored retirement plan after the owner dies. Different rules apply for spouses and non-spouses regarding how and when the money must be withdrawn.
Custodial Roth IRA This is a type of Roth IRA set up for a minor by a parent or legal guardian. The custodian manages the account until the child reaches the age of majority in their state, at which point control of the IRA transfers to the young adult. There are special rules required to open a custodial Roth IRA.
Custodial Roth IRA Rules
- Eligibility: The child must have earned income (e.g., wages from a part-time job).
- Contributions: Must be made with after-tax dollars and cannot exceed the minor’s earned income.
- Tax Treatment: Contributions are not tax-deductible, but earnings grow tax-free, and withdrawals are tax-free if the rules are followed.
- Age of Majority: Once the minor reaches the age of majority, they assume control of the account, which becomes a standard Roth IRA.
| IRA Type | Tax Treatment | Contribution Source | RMDs? | Best For |
|---|---|---|---|---|
| Traditional IRA | Pre-tax contributions, taxed on withdrawal | Individual | Yes (age 73) | Reducing taxable income now |
| Roth IRA | After-tax contributions, tax-free withdrawals | Individual | No | Tax-free income later |
| SEP IRA | Employer contributions only | Self-employed/small biz | Yes | High-income business owners |
| SIMPLE IRA | Employer + employee contributions | Small businesses | Yes | Companies with <100 employees |
| Spousal IRA | Same as Traditional or Roth | Working spouse | Yes/No | Non-working spouses |
| Inherited IRA | Taxed based on source | Beneficiaries | Yes (within 10 years) | Passing wealth to heirs |
| Custodial Roth IRA | After-tax, tax-free growth | Parent/guardian (minor must have earned income) | No | Starting kids early |
| Self-Directed IRA | Depends on structure | Individual | Yes/No | Investing in alternatives (real estate, etc.) |
2026 IRA Contribution Limits
- Traditional IRA
- Limit: $7,500 annually. ($7,000 in 2025)
- Catch-up Contribution (age 50 or older): Additional $1,100. ($1,000 in 2025)
- Roth IRA
- Limit: $7,500 annually. ($7,000 in 2025)
- Catch-up Contribution (age 50 or older): Additional $1,100. ($1,000 in 2025)
- SEP IRA (Simplified Employee Pension)
- Limit: 25% of compensation or $72,000, whichever is less. ($70,000 in 2025)
- SIMPLE IRA (Savings Incentive Match Plan for Employees)
- Limit: $17,000 annually. ($16,500 in 2025)
- Catch-up Contribution (age 50 or older): Additional $4,000. ($3,500 in 2025)
- Catch-Up Contribution (age 60-63): Additional $5,250
- Self-Directed IRA
- This follows the same contribution limits as Traditional or Roth IRAs, depending on which type the self-directed IRA is structured as:
- Limit: $7,500 annually.
- Catch-up Contribution (age 50 or older): Additional $1,100.
- This follows the same contribution limits as Traditional or Roth IRAs, depending on which type the self-directed IRA is structured as:
- Spousal IRA
- The limits for a spousal IRA are the same as those for Traditional or Roth IRAs, depending on which type is used:
- Limit: $7,500 annually.
- Catch-up Contribution (age 50 or older): Additional $1,100.
- The limits for a spousal IRA are the same as those for Traditional or Roth IRAs, depending on which type is used:
- Inherited IRA
- Contributions to an Inherited IRA are not allowed. However, required minimum distributions (RMDs) must be taken according to IRS rules.
- Custodial Roth IRA
- The limits for a custodial Roth IRA are the same as those for Roth IRAs, depending on which type is used:
- Limit: $7,500 annually, but can not exceed the minor’s earned income.
- The limits for a custodial Roth IRA are the same as those for Roth IRAs, depending on which type is used:
IRA Income Limits for 2026
Roth IRA Income Limits
- Single Filers and Head of Household:
- MAGI less than $153,000: Full contribution.
- MAGI $153,000 to $168,000: Reduced contribution.
- MAGI more than $168,000: Not allowed to contribute.
- Married Filing Jointly:
- MAGI less than $242,000: Full contribution.
- MAGI $242,000 to $252,000: Reduced contribution.
- MAGI more than $252,000: Not allowed to contribute.
- Married Filing Separately:
- MAGI $10,000 or less: Reduced contribution.
- MAGI more than $10,000: Not allowed to contribute.
Traditional IRA Deduction Limits 2026 (If Covered by Workplace Plan)
| Filing Status | Full Deduction | Partial | No Deduction |
|---|---|---|---|
| Single/Head of Household | < $81,000 | $81k–91k | > $91,000 |
| Married Filing Jointly | < $129,000 | $129k–149k | > $149,000 |
| Married Filing Separately | N/A | < $10,000 | > $10,000 |
IRA Annuities: Use Your IRA To Create a Personal Pension or Tax Shelter
An IRA annuity is an annuity funded with pre-tax or Roth IRA dollars to provide either guaranteed retirement income or safe, tax-deferred growth. These products turn a retirement account into a personal pension or an alternative to traditional stocks and bonds.
IRA annuities preserve the tax treatment of the account. You can roll over or transfer your IRA to an annuity contract offered by an insurance company without triggering taxes, as long as it’s done directly.
IRA MYGAs: Fixed Growth, No Market Risk
What it is: A Multi-Year Guaranteed Annuity (MYGA) functions like a CD inside your IRA but with better rates and tax-deferral. You lock in a fixed interest rate for a set number of years (typically 3 to 10).
Why it works: You get predictable growth with no risk of loss. MYGAs allow penalty-free withdrawals annually (often 10%) and are ideal for people nearing RMD age or looking to park their IRA safely for the short to medium term.
Best For:
- Retirees 60+ seeking safe accumulation
- Conservative investors avoid market risk
- RMD planning with fixed growth
Drawbacks:
- No market upside
- Surrender charges for early withdrawal beyond limits
IRA FIAs: Growth With Protection + Guaranteed Income
What it is: A Fixed Indexed Annuity (FIA) grows based on a stock market index, like the S&P 500, but without the risk of losing money during down years. Inside an IRA, FIAs offer tax-deferred index-based growth and can include lifetime income riders.
Why it works: With a Guaranteed Lifetime Withdrawal Benefit (GLWB), your IRA becomes a personal pension—you receive income for life, even if the account value goes to $0. Unlike SPIAs, you maintain control over your funds and preserve a death benefit.
Best For:
- Pre-retirees 5–18 years from retirement
- Retirees seeking a predictable income
- Joint lifetime income for married couples
Drawbacks:
- Riders may carry annual fees (typically under 1.25%)
- Growth is usually capped or participation-rate-limited
- No direct stock ownership
IRA Variable Annuities: Market Growth With Optional Guarantees
What it is: A Variable Annuity (VA) lets you invest your IRA in subaccounts similar to mutual funds. You can add guaranteed income riders, death benefit riders, and other protections, but all come at a cost.
Why it works: You want the long-term potential of market returns with optional income guarantees, but you’re willing to pay higher fees and accept market risk.
Best For:
- Growth-seeking investors with a long time horizon
- IRA owners looking for income and investment customization
- People with a high risk tolerance
Drawbacks:
- High fees (often 2–4% annually)
- Loss of value during market downturns
- Complex and harder to understand
Why Use Annuities In An IRA?
Personal Pension Strategy:
- GLWB annuities turn IRA assets into guaranteed lifetime income.
- No need to rely on stock market performance for retirement income.
- Joint income options ensure both spouses are protected.
Tax-Deferred Accumulation Strategy:
- MYGAs and FIAs protect your IRA principal while still growing.
- Avoid market risk and reduce the stress of stock volatility.
- Use for conservative retirement asset allocation.
Legacy & RMD Planning:
- Income-based annuities help fulfill RMD obligations predictably.
- Death benefit riders protect heirs and preserve value.
- Pair with life insurance to restore estate value lost to annuitization or income withdrawals.
Final Comparison: IRA Annuity Types
| IRA Annuity Type | Growth Method | Risk Level | Income Option | Ideal Use Case |
|---|---|---|---|---|
| MYGA | Fixed interest | None | Optional | Safe parking for IRA pre-retirement |
| FIA | Index-linked | Low | Yes (GLWB) | Lifetime income with no market loss |
| Variable Annuity | Market-based | High | Yes (optional) | Growth with long-term income needs |
Backdoor Roth IRA Strategy
For high earners over the Roth income limits:
- Contribute to a Traditional IRA (nondeductible)
- Convert to Roth IRA (asap to avoid earnings tax)
- Watch the pro-rata rule if you have other pre-tax IRA money
Tip: Use only if you’re ineligible for direct Roth contributions and have minimal other IRA balances.
Tax Rules and Withdrawal Penalties
- Before age 59½: 10% penalty unless exception applies
- Traditional IRAs: Distributions taxed as income
- Roth IRAs: Withdraw contributions anytime; earnings are tax-free after age 59½ and 5-year rule
Penalty Exceptions:
- First-time home (up to $10,000)
- Higher education
- Disability
- Death
- Health insurance (if unemployed)
- Medical expenses > 7.5% of AGI
- Birth/adoption ($5,000)
- Substantially equal periodic payments (SEPP Rule 72(t))
What Happens At Death?
- Traditional IRA: Taxable to heirs; must be emptied within 10 years (unless spouse)
- Roth IRA: Inherited tax-free if the 5-year rule is met
- Annuity with GLWB or death benefit rider: Preserves income or a lump sum for heirs
Pairing IRA annuities with life insurance creates a tax-efficient legacy plan—use income while living, and restore value after death.
Maximize Your IRA With Expert Help
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Questions From Our Readers
What are the benefits of investing in an IRA through a financial institution?
Investing in an IRA through a financial institution can provide tax advantages, potential investment growth, and a diversified portfolio to help save for retirement.
What are the benefits of investing in an IRA as part of your retirement plan?
Investing in an IRA as part of your retirement plan can provide additional retirement savings, potential tax benefits, and flexibility in managing your portfolio.
Can you cash out an IRA?
If you withdraw money from an Individual Retirement Account (IRA) before turning 59 and a half, you will usually have to pay taxes and an additional penalty tax of 10%. However, this penalty has some exceptions, such as using IRA funds to pay for medical insurance if you lost your job.
Does my money grow in an IRA?
IRAs, like any other investment, can increase in value over time. You can grow your IRA through annual contributions and by appreciating your investments.
I have a Merrill Edge IRA account; how do I withdraw a large amount, and is it taxable?
To withdraw a large amount from your Merrill Edge IRA account, you would typically initiate the withdrawal online or by contacting Merrill Edge customer service. Withdrawals before age 59 1/2 may incur a 10% early withdrawal penalty in addition to income taxes. However, there are exceptions such as disability, certain medical expenses, or first-time home purchases that may waive the penalty.
I took money from my IRA to buy out my partner. I still have the money in my account that I owe the IRS, but they have not reached out, and I don’t know where to send the money. What should I do?
If you withdrew money from your IRA and owe taxes on it, it’s important to address this proactively, even if the IRS hasn’t reached out yet, to avoid penalties and accrued interest. Typically, you would report the withdrawal when filing your annual tax return and pay any associated taxes at that time. If you’re unsure about the amount or the process, it’s advisable to consult with a tax professional. They can assist in determining the exact tax liability and guide you through the process of paying it, ensuring compliance and possibly avoiding penalties or interest for late payments.
What is better to have in an IRA, a CD, or a fixed annuity?
The better choice depends on your individual financial goals, risk tolerance, and the specifics of the products available to you. Fixed annuities generally offer higher interest rates compared to CDs and may provide more liquidity options. However, annuities often come with longer commitment periods and potential penalties for early withdrawal. CDs are typically considered safer and more straightforward, with fixed terms and FDIC insurance. Annuities might be more suitable for those seeking higher returns and can commit long-term, while CDs are often preferred for their safety and simplicity.
Can I invest my IRA into a flexible-premium deferred annuity?
Absolutely! You can definitely put your IRA money into a flexible-premium deferred annuity.
If I have a 401(k) and an IRA, are the contribution limits separate?
Yes, 401(k) and IRA contribution limits are separate. You can contribute to both a 401(k) and an IRA in the same year, and the limits for each type of account do not affect each other. This allows individuals to maximize their retirement savings by utilizing the distinct advantages of both types of accounts.
Are all IRAs the same?
No, there are several different types of Individual Retirement Accounts (IRAs), each with unique rules and benefits.
Does money in an IRA grow tax-free?
Yes, if it’s a Roth IRA. In a Roth IRA, your contributions are made with after-tax dollars, meaning you’ve already paid taxes on the money you put into it. The growth of your investments in a Roth IRA is tax-free, as are the withdrawals, provided certain conditions are met. This includes a five-year holding period and reaching the age of 59½, among other stipulations.
What are the downsides of an IRA?
Limited contribution limits, full taxability when you withdraw from a traditional IRA, and exposure to market loss, which can lead to uncertainty in growth, are some of the potential downsides of an IRA.
Do Traditional IRAs earn interest?
Yes, Traditional IRAs can earn interest, but they typically generate returns through a wider range of investments, such as stocks, bonds, mutual funds, and ETFs, not just interest income. The choice of investments determines the IRA’s growth potential.
How much interest does an IRA earn?
The average return on an IRA varies widely depending on its investment choices. Historically, IRAs invested in a mix of stocks and bonds might average returns of 5% to 8% per year.
Are IRA accounts insured?
IRA accounts are not directly insured, but the funds held within an IRA at a bank or brokerage are protected up to 0,000 by the FDIC or SIPC, respectively.
Can you lose money on a Roth IRA?
Yes, you can lose money on a Roth IRA if the investments within the account decline in value. While Roth IRAs offer tax-free growth and withdrawals, they are still subject to the risks associated with their underlying investments.
How much money do I need to open an IRA?
The minimum amount required to open an IRA varies by financial institution. Some providers allow you to open an IRA with no minimum deposit, while others may require anywhere from $100 to $1,000 or more.
How many IRAs can you have?
You can have multiple IRAs, including different types (like Traditional, Roth, SEP, and SIMPLE IRAs), but total contributions across all accounts cannot exceed the annual contribution limits set by the IRS for your age and income level.