What is an IRA? Everything You Need to Know About Retirement Savings

Planning for retirement is one of the most important financial steps you can take. While many employees are familiar with 401(k) plans offered by their workplace, not everyone knows about the flexibility and benefits of Individual Retirement Accounts (IRAs). Unlike a 401(k), almost anyone with earned income can open an IRA, making it one of the most accessible and powerful ways to save for the future.

In this blog, we’ll break down the essentials of IRAs: what they are, how they work, the different types available, and why they could be a smart move for your financial goals.

What is an IRA?

An Individual Retirement Account (IRA) is a personal savings account that offers tax benefits to help you save for retirement. You can open an IRA through a bank, brokerage firm, or other financial institution, and the funds you contribute are invested to grow over time.

IRAs differ from employer-sponsored plans like 401(k)s because you don’t need a workplace plan to get started. Anyone with earned income is eligible, and the annual contribution limits apply regardless of where you work.

👉 For more information, visit the IRS IRA Basics page.

Traditional IRA: Save Now, Pay Taxes Later

A Traditional IRA allows you to contribute pre-tax dollars, which may reduce your taxable income today. The money inside the account grows tax-deferred, meaning you won’t pay taxes on investment gains until you withdraw the funds in retirement.

Key Features:

• Contributions may be tax-deductible depending on your income and filing status.
• Withdrawals in retirement are taxed as regular income.
• If you expect to be in a lower tax bracket in retirement, this option may save you money.

⚠️ However, withdrawals before age 59½ usually come with both income tax and an additional 10% penalty (unless an exception applies).

Roth IRA: Pay Now, Save Later

A Roth IRA flips the Traditional IRA model on its head. Contributions are made with after-tax dollars, meaning you don’t get a tax deduction now. But the real advantage comes later—qualified withdrawals in retirement are federally tax-free.

Key Features

• Withdrawals of contributions are always tax-free.
• Earnings can also be withdrawn tax-free if certain conditions are met (age 59½ and five years after the first contribution).
• No required minimum distributions (RMDs) during your lifetime.

There are income limits to contribute: in 2025, single filers must earn less than $165,000, while married couples filing jointly must earn less than $246,000.

👉 For details, check the IRS Roth IRA contribution limits.

IRA Contribution Limits for 2025

For the 2025 tax year:

• The annual contribution limit is $7,000.
• If you are age 50 or older, you can contribute up to $8,000 thanks to “catch-up” contributions.

Remember: this limit applies across all your IRA accounts. For example, if you have both a Traditional IRA and a Roth IRA, the combined contributions cannot exceed $7,000 (or $8,000 if eligible for catch-up).

IRAs for the Self-Employed

If you’re self-employed or own a small business, you can still save for retirement with a Simplified Employee Pension (SEP) IRA.

SEP IRA Highlights:

• Contribute up to the lesser of 25% of compensation or $70,000 (2025 limit).
• Contributions are tax-deductible.
• Works similarly to a Traditional IRA, with taxes applied at withdrawal.

This option is particularly valuable for freelancers, contractors, and small business owners who don’t have access to a workplace retirement plan.

Savings IRAs vs. Investment IRAs

When opening an IRA, you may encounter two common structures:

1. Savings IRAs – Offered by banks, they include insured CDs and money market accounts. These are low-risk options with modest, stable returns.
2. Investment IRAs – Offered by investment firms, they let you invest in stocks, bonds, mutual funds, and ETFs. These carry more risk but also offer higher growth potential over time.

The right choice depends on your financial goals, timeline, and risk tolerance.

Why Start Saving with an IRA Now?

Even small contributions can add up thanks to the power of compounding. The earlier you start, the more time your money has to grow. Plus, with Americans living longer and retirements lasting decades, building a strong nest egg is more important than ever.

An IRA provides:

• Tax advantages that maximize your savings.
• Flexibility beyond employer-sponsored retirement plans.
• Options for both employees and self-employed individuals.

Tips Before Opening an IRA

• Compare providers: Look at fees, investment options, and account flexibility.
• Know your tax bracket: This will help you decide between Traditional and Roth IRAs.
• Plan for withdrawals: Remember the penalties for early withdrawals and the RMD rules for Traditional IRAs.
• Consult a tax advisor: Tax rules are complex, and professional advice ensures you’re making the best decision.

Conclusion: IRAs are for Everyone

Whether you’re employed, self-employed, or planning your next financial move, an IRA is one of the best tools available to prepare for retirement. With multiple types to choose from—Traditional, Roth, and SEP IRAs—you can find the one that aligns with your income, tax situation, and retirement goals.

Don’t wait until retirement is just around the corner. Start today, take advantage of tax benefits, and give your future self the financial security you deserve.

👉 Ready to learn more about retirement planning and tax strategies? Visit Resoly for tools and expert guidance.