Guide to IRA Plans

What is an IRA?

An Individual Retirement Account (IRA) is a retirement savings account you open on your own — not through an employer. Anyone with earned income can contribute, within limits set by the IRS.

If a 401(k) is the account you get because of where you work, an IRA is the account you get because you decided to save. They cover slightly different ground, and most people benefit from having both.

The five types

There are five common kinds of IRA, each with a different tax treatment and different rules about who can contribute.

Traditional IRA

• Contributions may be tax-deductible depending on your income and whether you’re covered by a workplace plan.
• Earnings grow tax-deferred.
• Withdrawals in retirement are taxed as ordinary income.

Roth IRA

• Contributions are made with after-tax dollars (no deduction).
• Earnings grow tax-free.
• Qualified withdrawals in retirement are completely tax-free.
• Income limits apply — high earners may not be able to contribute directly.

SEP IRA

• Designed for self-employed people and small business owners.
• Contributions made by the business, deductible to the business.
• Much higher contribution limits than a Traditional or Roth.

SIMPLE IRA

• For small employers (typically under 100 employees) who want to offer a workplace plan without the cost of a 401(k).
• Both employer and employee contribute.

Rollover IRA

• A Traditional IRA used to receive funds rolled over from an employer plan (most often a 401(k) when you leave a job).
• Same tax rules as a Traditional IRA, but kept separate so the funds remain eligible to roll back into a future employer plan.

2025 contribution limits

Roth vs. Traditional, in one sentence

Income limits and the backdoor Roth

Roth IRAs phase out at higher incomes. For 2025, the contribution starts to phase out at:

• Single filers: $150,000 to $165,000 modified AGI
• Married filing jointly: $236,000 to $246,000 modified AGI

Above the upper bound, you can’t contribute directly. Higher earners sometimes use a backdoor Roth — contributing to a Traditional IRA non-deductibly, then converting it. That’s a topic for its own conversation; the pro-rata rule can complicate it.

Withdrawals

1. Early withdrawals before age 59½ are generally hit with a 10% penalty plus income tax (on Traditional). Some hardship and first-home-buyer exceptions exist.
2. Roth contributions (not earnings) can always be withdrawn tax- and penalty-free, since you already paid tax on the way in.
3. Required Minimum Distributions (RMDs) apply to Traditional IRAs starting at age 73. Roth IRAs have no RMDs during the original owner’s lifetime.

Rolling over a 401(k)

When you leave a job, rolling your old 401(k) into a Rollover IRA gives you broader investment choices and (often) lower fees. The two ways to do it:

• Direct rollover — your old plan sends the money straight to your new IRA. No taxes withheld, no 60-day clock.
• Indirect rollover — they cut you a check; you have 60 days to deposit it into the new IRA. 20% gets withheld for tax, which you have to make up out of pocket to roll over the full amount.

Always do the direct rollover unless you have a very specific reason not to.

Key takeaways

• Anyone with earned income can open an IRA — no employer required.
• Traditional vs. Roth comes down to when you’d rather pay the tax.
• Self-employed? SEP and SIMPLE IRAs raise the contribution ceiling dramatically.
• Rolling over an old 401(k) into an IRA is usually a good move for fees and flexibility.