IRAs

Individual Retirement Accounts (IRAs), formally called “Individual Retirement Arrangements,” offer tax-deferred or tax-free ways to save for retirement. There are multiple IRA types, each with its own rules, tax treatment, and contribution limits.

If you open an IRA through a brokerage, your funds can be invested in government-approved asset classes such as stocks, bonds, mutual funds, and real estate. Below, we review the key types of IRAs and what you need to know about each.

Traditional IRAs

Traditional IRAs allow you to contribute pre-tax income. Contributions may be tax-deductible, and the money grows tax-deferred until retirement. The assumption is that you’ll be in a lower tax bracket during retirement when withdrawals begin.

Key features of Traditional IRAs:

• Early withdrawals before age 59½ generally trigger a 10% penalty plus income taxes
• Required minimum distributions (RMDs) must begin at age 73
• 2025 contribution limit: $7,000 per person
• If you’re 50 or older, you can make an additional $1,000 catch-up contribution (total: $8,000)

Traditional IRA Deduction Phase-Outs (2025)

You can still contribute above these income thresholds, but the contribution won’t be deductible.

Roth IRAs

Roth IRAs, introduced under the Taxpayer Relief Act of 1997, are funded with after-tax dollars. You won’t receive a deduction when you contribute, but your money grows tax-free, and qualified withdrawals are not taxed.

Key features of Roth IRAs:

• Contributions are made with after-tax dollars, so distributions are tax-free
• Investment earnings are also free from taxation if rules are met
• Same contribution limits as Traditional IRAs: $7,000 per year, or $8,000 if age 50 or older

Roth IRA Income Eligibility (2025)

SEP-IRAs

SEP-IRAs (Simplified Employee Pension IRAs) are often used by self-employed individuals or small business owners with few or no employees. They function similarly to Traditional IRAs but allow for much larger contributions.

Key features of SEP-IRAs:

• Funded by employer contributions—employees do not contribute
• Maximum 2025 contribution: 25% of compensation or $69,000, whichever is less
• Contributions are tax-deductible for the business
• Withdrawals before age 59½ may face penalties and taxes
• RMDs required starting at age 73

SIMPLE IRAs

SIMPLE IRAs (Savings Incentive Match Plan for Employees) are another option for small business owners. These accounts offer employer matching and are easier to manage than 401(k) plans.

Key features of SIMPLE IRAs:

• Employers can match employee contributions up to 3%
• 2025 contribution limit: $16,000
• Catch-up contribution for those 50 or older: $3,500 (total: $19,500)
• Contributions are tax-deductible for both employee and employer
• Early withdrawals may incur a 25% penalty in the first two years

Holding Multiple IRAs

You can own multiple IRA types, but the annual contribution limit for Traditional and Roth IRAs is shared. For 2025, the combined limit is:

• $7,000 total across Traditional + Roth IRAs
• $8,000 if you’re age 50 or older

SEP and SIMPLE IRAs have separate limits, allowing higher total contributions when used together. Coordinating your contributions across accounts can help maximize tax advantages.

IRA Type Comparison

IRA Withdrawal Rules by Account Type