IRA 101: What they are and how they can help you save for retirement

An IRA, or individual retirement account, is a tax-advantaged investment account designed to help you reach your retirement goals. Whether you’re just starting your career or getting close to retirement, an IRA can help you build a strong financial foundation for the future. In this post, we’ll cover:

What is an IRA?

IRA stands for Individual Retirement Account. These accounts are tax-advantaged, which means they have tax benefits such as deferring taxes on contributions and earnings until distribution, tax-exempt earnings, and/or providing tax deductions.

Unlike a 401(k) plan, IRAs aren’t linked to an employer. That means you can open an IRA independently whenever you want, even if you do or don't have a company-sponsored 401(k) plan.

There are two types of IRAs:

What is the difference between a traditional and Roth IRA?

The key difference between a traditional and a Roth IRA is when you receive a tax break. An easy way to remember this is:

Generally, with a traditional IRA, you get the tax advantage when the contribution is made. This is because, as long as certain conditions are met, you can claim your contribution as a deduction to your taxable income for that year.

For example, if your taxable income is $60,000 for the year, and you contributed $5,000 to your traditional IRA, your taxable income is reduced to $55,000. When you request a distribution from your traditional IRA, it will be taxed as ordinary income in the year the funds are distributed. There is no distinction between what you contributed and what you earned by being invested; the entire withdrawal counts as income.

With a Roth IRA, you can enjoy the tax advantage when the funds are distributed. Since your contributions were not tax-deductible — and therefore were not claimed as a deduction to your income in the year the contributions were made — the contribution portion of the distribution is always tax-free.

The earnings will also be distributed tax-free if the distribution is a qualified distribution. Using the same example as above, if your taxable income is $60,000, and you contribute $5,000 to a Roth IRA, your taxable income for that year is still $60,000. Because of the after-tax status of Roth IRAs, the IRS has income limits that determine whether or not you may contribute.

What are the benefits of an IRA?

IRAs are a retirement savings option for anyone who earns taxable income in a given tax year. They can be a great way for individuals to reach their retirement savings goals, whether you’re self-employed, want additional savings outside of your employer-sponsored 401(k) plan or don’t have access to an employer-sponsored 401(k) plan.

Tax-advantaged

For starters, your contribution to an IRA may lower your taxable income (either at the time of contribution or distribution), which is how much of your income is subject to state and federal income taxes. Additionally, as your IRA balance fluctuates alongside the market, you will not be subject to capital gains taxes on the earnings like you would with a taxable investment account. This is why the IRS limits how much an individual may contribute each year.

More flexibility

In addition to the tax benefits, IRAs can offer more flexibility compared to a 401(k) plan. For example, the IRS allows early withdrawals up to $10,000 without penalty for first time home buyers. Also, distributions can be taken from an IRA at any time, if your distribution meets the IRS exception criteria, instead of defined distribution triggers that must be met in a 401(k) plan in order to take a distribution.

More autonomy and options

With a 401(k) plan, you are a participant in your company’s plan. They can change the plan features or the plan’s investments at any time and they don’t need your approval to make those changes. Plus, if you leave that job, you lose the ability to contribute to that 401(k) plan. With an IRA, the account is yours to manage as you see fit. Also, IRAs may offer more flexible investment options than 401(k) plans, allowing you control of what you invest your money in, such as stocks, bonds, and mutual funds.

Who should consider an IRA?

An IRA can help anyone reach their long-term retirement savings goals no matter where they are in their retirement journey. An IRA may be a fit for individuals who:

As with any financial decision, consult an advisor or tax professional to help determine if an IRA could be a retirement savings option for you.

What is a rollover IRA?

Many savers open an IRA specifically to "roll over" funds from existing retirement accounts, such as a 401(k), 403(b), or 457(b) plan, from a previous employer. Sometimes people talk about "rollover IRAs" as if it is its own category, but in reality, it’s just a traditional IRA or Roth IRA with the same tax advantages and contribution limits. Which type of IRA you choose to "roll over" your funds into is entirely up to you.

Rollover IRAs make sense for savers looking to consolidate several retirement accounts rather than having a separate retirement account for each employer. On average, a 55 year old American will have had 12 different jobs in the course of their career. Consolidating disparate retirement accounts can help you keep track of your savings goals and potentially save you money by reducing or eliminating fees or commissions charged on each account.

How much can I contribute to an IRA?

You can make contributions to your IRA as long as you have taxable income in a given tax year. In 2025, individuals can contribute $7,000 to their traditional or Roth IRA. Individuals 50 and older can make an additional catch-up contribution of $1,000.

Two important things to note here:

Can I have a 401(k) and an IRA?

Yes. It’s a common misconception that you can only have a 401(k) plan or an IRA, but you can have and contribute to both, with both retirement account types having their own contribution limits.

How much does an IRA cost?

Like a 401(k) plan, an IRA typically has account management fees, which can be a percentage of the value of your portfolio. When choosing an IRA, it’s could be a good idea to understand and compare account management fees across different account providers, as those fees can add up. You’ll also need to consider the expense ratios, which are the cost of the investments themselves.

At Guideline, we’ve made it our mission to help everyone arrive at a secure retirement, which is why we’ve designed an IRA that is:

Finding your road to retirement

It’s never too early or too late to save for your future. Learn more about setting up an IRA with us. And if you found this content helpful, here are a few more resources you might be interested in: