IRA

An IRA — individual retirement account — is a tax-advantaged retirement account you open on your own at a brokerage or bank, not through an employer. It comes in two main flavors. A traditional IRA generally lets contributions be deducted from taxable income today; withdrawals in retirement are taxed as ordinary income. A Roth IRA takes after-tax contributions; qualified withdrawals in retirement are entirely tax-free.

The IRA contribution limit is set by the IRS, adjusted periodically, and is lower than the 401(k) limit — with an additional catch-up amount for people 50 and older. Roth IRA eligibility phases out above certain income thresholds. Traditional IRA deductibility phases out too, if you or a spouse is covered by a workplace retirement plan.

Withdrawals before age 59½ generally trigger income tax plus a 10% penalty, with specific exceptions. When leaving a job, a 401(k) can typically be rolled into an IRA, which broadens the investment menu and consolidates accounts.