In the United States, an IRA (Individual Retirement Account) is a type of retirement plan with taxation benefits defined by IRS Publication 590. It is a government tax break to incentivize people to invest money for retirement.
Among the different IRAs, the most common are Traditional IRAs and Roth IRAs. The contributions to a Roth IRA are not tax-deductible, but the withdrawals after retirement are tax-free. Conversely, the contributions to a Traditional IRA are tax-deductible but are taxed on withdrawals after retirement. For most people, their expected income after retirement will be lower than that during working years. Therefore their expected marginal tax rates after retirement will likely be lower. As a result, they may find that Traditional IRAs are more financially beneficial simply because taxation occurs in retirement and not during prime working years. Both accumulate more wealth than regular taxable savings or investments due to the presence of tax shields. SEP (Simplified Employee Pensions) IRAs are popular with self-employed contractors with a handful of employees, and SIMPLE IRAs are designed for small businesses with less than 100 employees.
As the most common IRA in use, Traditional IRAs are qualified retirement plans that have tax shields in place for funds set aside for retirement. They are ideal for people who want to reduce a tax bill while at the same time saving for retirement.
Taxation only occurs when withdrawing before or in retirement. However, early withdrawals will be penalized, except in qualified cases. The contributions made are tax-deductible for most people as long as several requirements, dependent on tax-filing status and gross income, are met. After age 59 ½, withdrawals from Traditional IRAs are penalty-free. Traditional IRA withdrawals are not required until after age 73 when it becomes mandatory to take the required minimum distribution (RMD). Most people are eligible for Traditional IRAs.
These are often initiated and managed by individuals with contributions coming from after-tax income or assets. Investment income is tax-free, and withdrawals are tax-free. After turning age 59 ½, withdrawals from Roth IRAs are penalty-free. However, Roth IRA withdrawals are not mandatory during the owner's lifetime. Without distribution, Roth IRAs can grow tax-free throughout the owner's entire lifetime.
Simplified Employee Pension (SEP) IRAs, which are initiated by employers, allow employers to make contributions to the IRA accounts of their employees. SEP IRAs are mostly used by small businesses or self-employed individuals, so they are designed to be easier to set up than other IRAs. They function similarly to Traditional IRAs in tax treatment, balance accumulation, and distribution. Employers may deduct contributions as business expenses. Contribution limits for these are different from the more popular IRAs above; for 2026, the limit is the lesser of 25% of gross income, or $72,000. This is almost ten times the amount of the more popular Traditional or Roth IRAs. All proceeds are immediately 100% vested. There is no catch-up contribution for account holders age 50 or older. All qualified employees must receive the same benefits under their SEP IRAs.
Savings Incentive Match Plan for Employee (SIMPLE) IRAs are mainly designed for small businesses with 100 or fewer employees, as the administrative costs associated with a SIMPLE IRA are much lower than those required by a 401(k). Also, employers may deduct contributions as business expenses. For this retirement plan, employers must choose between two matching options for their employees. The first is a match of employee's contributions up to 3% of their compensation. The second is a fixed rate of 2% of every employee's compensation, regardless of whether they participate. In both cases, annual contribution limits are $17,000 (additional $4,000 for employees over 50 and $5,250 for those aged 60 to 63) or 100% of compensation for 2026.
It is important to note that the early withdrawal penalty is 25% for SIMPLE IRAs, which is much higher than the 10% of Traditional or Roth IRAs. SIMPLE IRAs can only be cashed out without penalty after two years.
Existing qualified retirement plans, such as 401(K)s, 403(B)s, SIMPLE IRAs, or SEP IRAs, can be "rolled over," or consolidated, into a Traditional IRA. Many other plans, including 457 plans or inherited employer-sponsored plans (for designated beneficiaries), can also be rolled over. There are no taxes due when rolling over company plans directly into IRAs. However, remember to report all rollovers on tax returns, even when no taxes are due.
Rolling over an IRA is not the only option available. Some may choose to leave accumulated assets in their former employer's plan, even after leaving to work at a different company. Others may move their assets into their new employer's plan. It is also possible to cash out retirement plans, though this usually results in early withdrawal penalties and taxes.
Traditional IRA vs. 401(k)
Traditional IRAs and 401(k)s are two of the most popular tax-deferred, defined contribution retirement plans. Both turn pre-tax income into tax-deductible contributions that are placed into retirement plans that receive tax-sheltered growth, with the goal of incentivizing saving for retirement. In retirement, both plans distribute taxable funds, usually to retirees who are in lower income tax brackets. It is also possible to make a maximum contribution to both within the same tax year. In 2026, this is $24,500 towards a 401(k) and $7,500 ($8,600 if older than 50) towards a Traditional IRA.
The main difference between the two is that 401(k)s have a higher contribution limit and usually offer a company match. That is, employers can choose to match a percentage of their employees' contributions to their 401(k) retirement plans. If the 401(k) has a contribution match, it is generally advisable to contribute a minimum amount equal to at least the amount the company is willing to match. While 401(k)s are generally limited to very few investment options offered through employers, with relatively high administrative fees, Traditional IRAs provide almost limitless investment options.
SEP and SIMPLE IRA vs. 401(k)
Unlike Traditional IRAs, which do not have any form of company matching such as those typical of a 401(k), SEP and SIMPLE IRAs do, though the matching system is not the same. These different matching systems are offered specifically through these IRAs because they are mainly intended for smaller companies that are too small in scale to offer 401(k) programs to their employees.
One beneficial aspect of IRAs is that because they are available through most financial firms, there are ample investment options to choose from. The following are some common options:
A Self-Directed IRA (SD-IRA) can be set up in place of a Traditional or Roth IRA and will have the same characteristics regarding eligibility, contributions, and distributions. While a Traditional or Roth IRA account holder might choose between stock or funds, the owner of an SD-IRA is required to find their own investable assets. SD-IRAs are popular with people who want to invest in less common assets such as privately-held companies, hedge funds, investment real estate, limited partnerships, crowdfunding, tax liens, Bitcoin and other digital currencies, or a friend's farm.
Opening an SD-IRA account is trickier than the generic Traditional or Roth IRA. While most financial firms offer Traditional or Roth IRAs, SD-IRAs are more likely to be found at smaller, specialized financial firms. Keep in mind that SD-IRA accounts are heavily scrutinized by the IRS.
With that said, SD-IRAs are only recommended for expert investors or for people who are willing and able to work with a professional. It is important to note that there are investments that are not allowed in any IRA, regardless of whether they are self-directed or otherwise. These include life insurance, S corporations, antiques or collectibles, art, personal real estate used as a residence, and certain derivative positions.
Q: What is the difference between a Traditional IRA and a Roth IRA?
A: Traditional IRA contributions are tax-deductible, and withdrawals in retirement are taxed as income. Roth IRA contributions are made with after-tax dollars, and qualified withdrawals in retirement are completely tax-free.
Q: What is the contribution limit for an IRA in 2026?
A: For 2026, the contribution limit for Traditional and Roth IRAs is $7,500 for individuals under 50, and $8,600 for those 50 and older. SEP IRAs have a much higher limit of up to $72,000, and SIMPLE IRAs have a limit of $17,000 (with catch-up contributions for those 50+).
Q: When can I withdraw from my IRA without penalty?
A: For Traditional and Roth IRAs, you can generally withdraw without penalty after age 59 ½. For SIMPLE IRAs, the penalty-free withdrawal period is after two years of participation. Early withdrawals are subject to a 10% penalty (25% for SIMPLE IRAs) plus income taxes.
Q: Does this calculator account for inflation?
A: No, this calculator does not account for inflation. The results are in nominal dollars. To see the real value of your investment, you would need to adjust for inflation separately.
Q: Can I use this calculator for retirement planning?
A: Absolutely! This calculator is perfect for retirement planning. You can input your current savings, expected annual contributions, and an estimated return rate to see how much you could have by retirement.