An Individual Retirement Account (IRA) is one of the most powerful wealth-building tools available to American workers. It's a tax-advantaged account designed specifically for retirement savings, and unlike a 401k, you can open one on your own—no employer required.
The two main types are Traditional IRAs and Roth IRAs. Traditional IRAs may give you a tax deduction today, while Roth IRAs provide tax-free growth forever. Both have annual contribution limits ($7,000 in 2025, or $8,000 if you're 50+), and both offer huge long-term benefits if you use them correctly.
This guide covers everything: contribution limits, deductibility rules for Traditional IRAs, Roth income limits, when to choose each type, rollover IRAs, spousal IRAs, and how to open your first IRA account.
The IRS sets annual limits on how much you can contribute to IRAs. For 2025, the limits are:
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View on Amazon →These limits apply to all your IRAs combined. If you have both a Traditional IRA and a Roth IRA, your total contributions across both accounts cannot exceed $7,000 (or $8,000 if age 50+). You can split contributions however you want—$4,000 Traditional and $3,000 Roth, for example—but the combined total is capped.
You have until April 15, 2026 to make your 2025 IRA contribution. This means you can contribute for the previous tax year up until Tax Day. If you file your taxes in February, you can still contribute for 2025 until mid-April.
This extended deadline is helpful if you get a year-end bonus or tax refund and want to funnel it into your IRA retroactively.
To contribute to an IRA, you must have earned income at least equal to your contribution. Earned income includes:
Earned income does not include investment income, Social Security benefits, unemployment, or pension distributions. If you made $5,000 in earned income this year, you can contribute up to $5,000 to an IRA (not the full $7,000).
A Traditional IRA works like a 401k: you contribute pre-tax dollars (or claim a deduction when you file taxes), your money grows tax-deferred, and you pay ordinary income tax when you withdraw in retirement.
When you contribute to a Traditional IRA, you may be able to deduct the contribution from your taxable income. If you contribute $7,000 and you're in the 22% tax bracket, you save $1,540 in federal taxes that year.
Full deductibility: If you (and your spouse, if married) are not covered by a workplace retirement plan (401k, 403b, 457), your Traditional IRA contribution is fully deductible regardless of income.
Phased-out deductibility: If you are covered by a workplace plan, your deduction phases out at higher incomes:
| Filing Status | 2025 Phase-Out Range |
|---|---|
| Single / Head of Household | $77,000 - $87,000 |
| Married Filing Jointly (you covered by plan) | $123,000 - $143,000 |
| Married Filing Jointly (spouse covered, you're not) | $236,000 - $246,000 |
| Married Filing Separately | $0 - $10,000 |
Above the phase-out range, you can still contribute to a Traditional IRA, but you get zero tax deduction. This is called a non-deductible Traditional IRA and is rarely useful except for backdoor Roth conversions.
When you withdraw from a Traditional IRA in retirement, the entire amount is taxed as ordinary income. If you contributed $7,000 and it grew to $20,000, all $20,000 is taxable when withdrawn.
Required Minimum Distributions (RMDs): Starting at age 73 (for those born 1951-1959) or 75 (born 1960+), you must begin taking annual withdrawals from Traditional IRAs. The IRS forces you to take money out and pay taxes on it.
If you withdraw before age 59½, you pay a 10% penalty plus ordinary income tax. Exceptions include:
Bottom line: Traditional IRAs are designed to lock your money away until retirement. The tax benefits are powerful, but you sacrifice liquidity.
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A Roth IRA flips the Traditional IRA structure: you contribute after-tax money (no deduction now), but all withdrawals in retirement are 100% tax-free. You never pay taxes on the growth, and there are no RMDs.
Unlike Traditional IRAs, Roth IRAs have income limits. If you earn too much, you cannot contribute directly:
| Filing Status | 2025 Phase-Out Range | No Contribution Above |
|---|---|---|
| Single / Head of Household | $150,000 - $165,000 | $165,000 |
| Married Filing Jointly | $236,000 - $246,000 | $246,000 |
| Married Filing Separately | $0 - $10,000 | $10,000 |
If your income falls in the phase-out range, you can make a partial contribution. If you earn above the limit, you're locked out of direct Roth contributions—but you can still use the backdoor Roth IRA strategy (more below).
Roth IRAs have a key flexibility: you can withdraw your contributions anytime, tax-free and penalty-free. If you contributed $20,000 over the years, you can pull that $20,000 out whenever you want.
However, earnings are subject to rules:
This makes Roth IRAs incredibly flexible. In an emergency, you can access your contributions without penalty, but your earnings stay protected for retirement.
Roth IRAs have no RMDs during your lifetime. You can let the account grow indefinitely and pass it to heirs tax-free. This makes Roth IRAs excellent for estate planning and for people who don't need the money in retirement.
The classic question: should you take the tax break now (Traditional) or later (Roth)? The answer depends on your current tax bracket, expected future tax bracket, and financial goals.
If you're unsure, Roth is usually the safer bet for people under 40. Tax rates are historically low, and the flexibility of tax-free withdrawals in retirement is worth more than most people realize. You're also avoiding the risk of future tax increases.
If you're in your 50s, high-income, and plan to drop to a lower bracket in retirement, Traditional makes more sense.
A rollover IRA is not a separate account type—it's just a Traditional IRA that holds money rolled over from a 401k, 403b, or other workplace retirement plan.
When you leave a job, you have four options for your 401k:
Most people choose option 3: rolling the 401k into an IRA. This gives you access to thousands of low-cost index funds, better customer service, and no employer-plan restrictions.
Direct rollover vs indirect rollover: Always choose a direct rollover, where the money moves from 401k to IRA without touching your hands. If you take a check made out to yourself (indirect rollover), your employer withholds 20% for taxes, and you have 60 days to deposit the full amount (including the withheld 20% from your own funds) or face taxes and penalties.
If you have a Roth 401k, you roll it into a Roth IRA, not a Traditional IRA. This preserves the tax-free status. Roth 401k rollovers are not subject to income limits—even high earners can roll unlimited Roth 401k money into a Roth IRA.
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A spousal IRA allows a working spouse to contribute to an IRA for a non-working or low-earning spouse. This is a powerful way to double your household retirement savings even if one person stays home or works part-time.
The working spouse must have earned income at least equal to both IRA contributions. For example, if you earn $80,000 and your spouse has no income, you can contribute:
The spousal IRA is a separate account in the non-working spouse's name. It can be Traditional or Roth, and it follows all the normal IRA rules (contribution limits, withdrawal rules, etc.).
If both spouses contribute to Traditional IRAs, the working spouse may be able to deduct both contributions (subject to income phase-outs). If you contribute to Roth IRAs, there's no deduction, but you're building tax-free wealth for both spouses.
Spousal IRAs are especially valuable for single-income households or households where one spouse earns significantly less. It ensures both partners have retirement assets in their own names.
If your income exceeds the Roth IRA limits ($165,000 single, $246,000 married in 2025), you're blocked from contributing directly. But there's a workaround: the backdoor Roth IRA.
The result: you've effectively contributed to a Roth IRA despite being over the income limit. The IRS allows this because there are no income limits on conversions, only on direct contributions.
If you have existing pre-tax money in any Traditional, SEP, or SIMPLE IRA, the backdoor Roth becomes complicated. The IRS applies the pro-rata rule, which forces you to pay taxes on a proportional amount of the conversion based on your total IRA balances.
Example: You have $50,000 in a rollover Traditional IRA and contribute $7,000 to a new Traditional IRA for backdoor Roth purposes. When you convert the $7,000, the IRS treats 87.7% of it as taxable ($50,000 / $57,000), even though you just contributed it. This defeats the purpose.
Solution: Before doing a backdoor Roth, roll your existing Traditional IRA money into a 401k (if your employer plan allows reverse rollovers). This clears out pre-tax IRA balances and makes the backdoor Roth clean.
Opening an IRA is nearly identical to opening a taxable brokerage account (covered in our brokerage guide). Here's the quick version:
The process takes 10-15 minutes. Your account opens immediately, and you can start contributing right away.
Once your IRA is funded, buy low-cost index funds:
Avoid individual stocks in your IRA unless you're experienced. IRAs are for long-term wealth building, not speculation.
Confused about Traditional vs Roth? Not sure if you qualify? Our Roth IRA Master Guide includes decision flowcharts, tax calculators, and step-by-step backdoor Roth instructions for high earners.
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The 2025 IRA contribution limit is $7,000 per year if you're under age 50, and $8,000 if you're 50 or older (includes $1,000 catch-up contribution). This limit applies across all your IRAs combined—Traditional and Roth together.
Traditional IRA contributions may be tax-deductible now, and you pay taxes when you withdraw in retirement. Roth IRA contributions are made with after-tax money, but all withdrawals in retirement are tax-free. Roth has income limits; Traditional does not (but deductibility phases out if you have a 401k).
Yes, you can contribute to both. However, if you're covered by a workplace plan like a 401k, your Traditional IRA deduction may phase out at higher incomes ($77,000-$87,000 single, $123,000-$143,000 married for 2025). Roth IRA contributions have separate income limits and are not affected by 401k participation.
For 2025, Roth IRA contributions phase out between $150,000-$165,000 for single filers and $236,000-$246,000 for married filing jointly. Above these limits, you cannot contribute directly to a Roth IRA, but you can use the backdoor Roth strategy.
Yes, but you'll usually pay a 10% early withdrawal penalty plus income tax on Traditional IRA withdrawals. Roth IRA contributions (not earnings) can be withdrawn anytime tax- and penalty-free. Exceptions exist for first-time home purchase, education, and disability.
A spousal IRA lets a working spouse contribute to an IRA for a non-working or low-earning spouse. The working spouse must have enough earned income to cover both contributions. This effectively doubles your household IRA savings even if one spouse has no income.
A rollover IRA is a Traditional IRA that holds money rolled over from a 401k or other workplace retirement plan. It's not a separate account type—it's just a Traditional IRA. Rolling over a 401k preserves tax-deferred status and gives you more investment options.
Choose Roth if you're young, in a low tax bracket now, or expect higher taxes in retirement. Choose Traditional if you're in a high tax bracket now and expect lower taxes in retirement. If unsure, Roth is usually the better default for early-career workers.