IRA

An IRA is a wrapper, not an investment. You open it at a brokerage, a bank or a fund company, put money in from your own earned income, and choose what it holds, which can be any stock, bond, fund or certificate of deposit the provider offers; the wrapper is what keeps the yearly tax off the dividends and gains inside. Individual is the operative word: an IRA belongs to you and not to a job, so it follows you from employer to employer and is where a former employer's 401(k) usually ends up. The traditional IRA defers the tax, taking a deduction now and paying income tax on withdrawals later; its sibling, the Roth IRA, does the reverse.

In a sentence

• "She puts $400 a month into a traditional IRA and deducts the $4,800 on her tax return."
• "When he left the company, the old 401(k) became a rollover IRA at the brokerage where he already had an account."
• "An IRA you open yourself. A 401(k) comes through work, and it takes a much larger contribution."

How it works

1. You open the account at a provider of your choosing and pick the investments yourself, from anything the provider offers. A contribution that is never invested sits as cash.
2. You contribute from earned income, wages or self-employment income, up to an annual limit the IRS sets and changes most years. The limit is shared across all your IRAs, traditional and Roth together, and a contribution for a tax year can be made until the following spring's tax filing deadline.
3. A traditional contribution may be deductible. It is fully deductible when neither you nor your spouse is covered by a workplace plan; when one of you is, the deduction phases out above income levels the IRS sets, and a contribution above them still goes in, without the deduction.
4. The investments grow without yearly tax. Dividends, interest and gains inside the account are not taxed as they happen.
5. Withdrawals are taxed as ordinary income, deducted contributions and growth alike. A withdrawal before the age the IRS sets also carries a 10% penalty, with exceptions the IRS lists, and required minimum distributions begin at an age the IRS sets.

An example

$400 a month into a traditional IRA at the example's assumed 6% annual return.

By year thirty the growth is nearly twice the contributions, and none of it was taxed along the way. The $4,800 a year that went in was also deducted, worth $960 a year at the example's assumed 20% marginal rate, so the contributions cost $3,840 a year of take-home pay. The tax arrives at the end: every dollar withdrawn is taxed as income in the year it comes out, at whatever rate applies then.

Why it matters

An IRA is the retirement account for everyone a 401(k) does not reach, and the second account for everyone it does. A worker without a workplace plan has the IRA as the main tax-advantaged place to save; a worker with one uses it for the money beyond the match, or for the wider investment choice. It is also where old 401(k)s go: rolling a former employer's plan into an IRA keeps the tax deferral, puts every past job's savings in one account, and removes the balance most likely to be forgotten. The decision the account forces is traditional or Roth, a bet on whether your tax rate is lower now or later.

IRA versus 401(k)

A 401(k) comes through an employer and is funded by payroll; an IRA is opened and funded by you. The 401(k) has the higher annual limit, may carry an employer match, and limits you to the plan's investment menu; the IRA has no match and a limit that is a fraction of the 401(k)'s, and any investment the provider sells. Fund the 401(k) to the match first, because the match is pay; after that the order turns on the plan's fees and fund choice against the IRA's.

Common questions

Is an IRA the same as a 401(k)? No. Both are retirement accounts with the same choice of traditional or Roth tax treatment, but a 401(k) is an employer's plan funded from your paycheck, often with a match, and an IRA is your own account at a provider you chose, with a lower annual limit and no match.

Can I have an IRA and a 401(k) at the same time? Yes, and contribute to both in the same year. Being covered by the workplace plan does not stop the IRA contribution; it can reduce or remove the deduction for a traditional contribution above income levels the IRS sets, which is when a Roth IRA or a non-deductible contribution is the usual choice.

What is a rollover IRA? A traditional IRA that receives a former employer's 401(k) balance. A direct rollover, plan to provider, moves the money without tax or penalty and does not count against the year's contribution limit; the account then works like any other traditional IRA.

When can I take money out of an IRA? At any time, but a withdrawal is taxed as income, and before the age the IRS sets it also carries a 10% penalty unless it qualifies for an exception, such as a first home purchase up to an amount the IRS caps. Required minimum distributions start at an age the IRS sets and are taxed the same way.

Go deeper

• The Retirement calculator projects what a monthly contribution could grow to by the age you plan to stop working, what that is worth in today's dollars, and the monthly income it could support.
• The Compound interest calculator shows how a starting balance and a monthly contribution grow at a given return over the years, and how much of the final amount is growth rather than money you put in.
• How to track net worth across brokerages, crypto and a mortgage keeps every account, including the IRA and an old 401(k), on one list with its value and last-checked date.

Where it shows up in Zypper

Zypper counts an IRA as an investment account. Investment and brokerage accounts, including 401(k), IRA and Roth IRA, HSA, and 529 plans, connect wherever the provider supports a connection and contribute their balances to net worth, updated automatically every day; an account at a provider that cannot be connected is a manual account with the balance you set, counting toward net worth. Net worth is computed from every account and charted over time, so the IRA's growth shows as a line rather than a statement. See Supported account types and Net worth tracking for the details, or get started with Zypper to see the account beside everything else you own.