Guide to IRAs

Whatever your retirement dreams may be, you’re going to need to set aside some savings to help make them a reality. This is where Individual Retirement Accounts (IRAs) could help. While different IRAs come with different rules, these accounts all exist to help you save money for retirement.

This article will provide an overview of the three common types of IRAs – Traditional, Roth, and SEP – along with resources and links to help you learn more about these retirement saving vehicles. 

Traditional IRA

Individuals can contribute money to a Traditional IRA on a “pre-tax” basis (in other words, you may be allowed to claim a tax deduction for your contributions). Funds in the account can grow tax-deferred until you’re ready to withdraw them in retirement.

Good to know: Your eligibility to claim a deduction for your contributions depends on several factors, such as your filing status, income, and whether you have access to a retirement plan at work. Check in with a tax professional or visit the IRS website if you have questions.

Traditional IRA contribution limits

You may contribute to a Traditional IRA as long as you’re earning income (or “taxable compensation”). Like other retirement accounts, Traditional IRAs are subject to annual contribution limits, which are determined by the IRS.

For 2024 and 2025, the standard annual contribution limit is $7,000. If you’re age 50 or older, however, you can make an additional catch-up contribution of $1,000, which means you can contribute up to $8,000 total ($7,000 + $1,000). Visit IRS.gov for more information on “catch-up contributions.”

Traditional IRA withdrawal rules

Generally, you can withdraw money from a Traditional IRA penalty-free starting at the age of 59 ½, but you’ll have to pay income tax on the withdrawal.

Withdrawals prior to the age of 59 ½ are typically subject to income tax and a 10% early withdrawal penalty unless you qualify for an exception.

Good to know: Traditional IRAs are subject to required minimum distribution (RMD) rules. RMDs are withdrawals that you must make from Traditional IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). Failure to take RMDs may result in penalties. Visit IRS.gov for more information on your obligations. If you have questions about your specific situation, consult your financial advisor or a tax professional.

Opening a Traditional IRA

You can open an account through a bank, brokerage, or other IRA provider. Note that some firms require a minimum investment amount to open an account, so it’s a good idea to compare your options (as well as the potential fees) before setting up your IRA. 

Roth IRA

With a Roth IRA, your contributions are made with after-tax dollars, and your withdrawals in retirement are tax-free once certain conditions are met (e.g., you’ve reached the age of 59 ½ and you’ve had the account for at least five years).

Roth IRA contribution limits

Roth IRAs face the same annual contribution limits as Traditional IRAs (see the limits outlined above). 

Be aware that the annual IRA contribution limit refers to the total amount you can contribute across all of your IRAs in a year. In other words, for 2024 and 2025, the total contribution you can make to all of your Traditional and Roth IRAs can’t be more than $7,000 ($8,000 if you’re 50 or older). See IRS's "IRA Contribution Limits."

Good to know: Not everyone can contribute to a Roth IRA. Your Roth IRA contribution may be limited based on your filing status and income. The IRS updates the income thresholds each year. If you have questions about your eligibility, check in with a tax professional.

Roth IRA withdrawal rules

Generally, you may withdraw your contributions tax-free and penalty-free at any time. However, withdrawals of your account earnings before the age of 59 ½ (or before the account is five years old) are generally subject to income tax unless it’s a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.

Read more: What are the penalties for withdrawing early from an IRA?

Opening a Roth IRA

As long as you’re eligible, you can open a Roth IRA just as you would a Traditional IRA – through a bank or brokerage that offers this type of retirement account. If you have a Traditional IRA with a specific provider, you’ll likely be able to open a Roth with them as well.

SEP IRA

A Simplified Employee Pension or SEP IRA provides small business owners and the self-employed with a flexible method to contribute toward their employees’ retirement as well as their own retirement savings.

Good to know: SEP IRAs follow the same investment, distribution, and rollover rules as Traditional IRAs. Also, earnings in a SEP IRA can grow tax-deferred, and your contributions may be tax-deductible if you qualify.

SEP IRA contribution limits

For 2025, the annual maximum contribution limit is $70,000 ($69,000 for 2024) or 25% of compensation, whichever is less.

Generally, as an employer, if you contribute to a SEP IRA for yourself and your eligible employees, you must contribute to everyone’s account equally (based on a percentage of salary). That means if you want to put 20% of your own salary into a SEP IRA, you must contribute 20% of any eligible employee’s salary to their SEP IRA, too. Contributions to SEP accounts are always 100% vested, or owned, by the employee.

SEP IRA withdrawal rules

A SEP IRA follows the same general distribution rules as a Traditional IRA. Typically, if you withdraw money before age 59 ½, you may be subject to income tax and a 10% early withdrawal penalty.

Good to know: Required minimum distributions (RMDs) are withdrawals that you must make from SEP IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). RMDs are required by the IRS, and failure to take RMDs may result in penalties. Visit the IRS website for details.

Opening a SEP IRA

As with Traditional and Roth IRAs, you can shop for a SEP IRA through different providers online (e.g., bank, qualified financial institution, etc.). Once you decide on a financial institution to work with, they can guide you through the account opening process.

The IRS outlines three general steps to setting up a SEP.

1. Execute a written agreement to provide benefits to all eligible employees.
2. Inform employees of the agreement, which can include details like how employer contributions will be allocated.
3. Set up an IRA account for each eligible employee.