How an IRA Works

The plain answer

An individual retirement account, or IRA, is a tax-advantaged account you open for yourself. It is an account type, not an investment. After adding money, you still choose what to invest in, such as diversified mutual funds or exchange-traded funds.

For 2026, the IRA contribution limit is $7,500. People age 50 or older can contribute an additional $1,100. The limit generally applies across your traditional and Roth IRAs combined, not separately to each account.

How it actually works

You open an IRA with a brokerage or other eligible financial institution, contribute eligible compensation, and select investments inside the account. The tax rules depend on the IRA type.

• A traditional IRA may provide a tax deduction for contributions, depending on income, filing status, and workplace retirement plan coverage. Investment growth is tax deferred, and taxable withdrawals are generally included in income.
• A Roth IRA does not provide a deduction for contributions. Qualified withdrawals can be tax free, but income limits can restrict direct contributions.

Contribution eligibility and deduction eligibility are different questions. You might be allowed to contribute to a traditional IRA but receive no deduction. Roth IRA contribution eligibility can also change with income. Check the current rules before contributing.

The 2026 traditional IRA deduction phase-out figure for married filing jointly when your spouse is covered by a workplace plan is pending.

What this means for you

Choose the account based on tax treatment, eligibility, fees, and how it fits with your workplace plan. Then choose investments that match your time horizon and risk tolerance. Opening or funding the account without investing the cash can leave it sitting in a settlement fund.

Track contributions across every IRA you own so the combined amount stays within the annual limit. A contribution for a tax year may be allowed until the tax filing deadline, but confirm the deadline and designate the correct tax year with your provider.

If you have access to a workplace retirement plan, compare its employer match and fees with your IRA options. Capturing an available match often comes before making additional unmatched retirement contributions.

Common mistakes

• Treating an IRA as if it were an investment rather than an account that holds investments.
• Contributing cash and forgetting to invest it.
• Assuming traditional IRA contributions are always deductible.
• Contributing directly to a Roth IRA without checking income eligibility.
• Exceeding the combined annual limit across traditional and Roth IRAs.
• Withdrawing early without checking the tax and additional-tax rules.

Related pages

• IRA overview
• Traditional vs. Roth IRA
• How a 401(k) Works
• The Order of Operations for Your Money