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What is an IRA? Types of IRAs, Contribution Limits, and How IRAs Work

What is the Definition of an Individual Retirement Account (IRA) and How Does an IRA Work?

An Individual Retirement Account (IRA) is a qualified retirement account designed to help individuals save for retirement. IRA accounts allow for tax-deferred growth, making them a popular choice for retirement planning. There are different types of IRAs, each with unique rules and benefits. Contributions to a Traditional IRA may be fully or partially deductible based on your individual tax situation.

According to the SECURE Act, individuals are required to begin taking required minimum distributions (RMDs) from their Traditional IRA starting at age 72, unless they are still working in certain cases. Withdrawals from a Traditional IRA are taxed as ordinary income and may be subject to a 10% penalty if withdrawn before age 59½. The SECURE Act also allows contributions to a Traditional IRA beyond age 70½, as long as you meet the earned-income requirement.

What Are the Different Types of IRAs


There are several types of IRAs, each serving different retirement planning needs. Understanding the differences can help you choose the right one for your financial situation. Here are the most common types:

  • Traditional IRA: Allows individuals to make tax-deductible contributions. Taxes are paid when funds are withdrawn during retirement.
  • Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
  • SEP IRA: Designed for self-employed individuals and small business owners, allowing higher contribution limits than a Traditional IRA.
  • Nondeductible IRA: Contributions are not tax-deductible, but the account still offers tax-deferred growth.
  • Spousal IRA: Enables a non-working spouse to contribute to an IRA based on the working spouse’s income.
  • Self-Directed IRA: Provides greater flexibility in investment choices, including real estate, stocks, and other alternative assets.


What Is an IRA Account?

An IRA account is a type of retirement account that individuals can use to save for retirement. With a Traditional IRA, contributions are tax-deductible, and your money grows tax-deferred until you begin withdrawing it in retirement. At the individual level, an IRA is used to invest for the future, offering a vehicle for individuals to reduce their taxable income and build assets for retirement.

At our firm, we help clients understand the most suitable IRA options based on their goals and financial situation. Whether you're seeking to maximize tax-deferred growth with a Traditional IRA or exploring the benefits of a Roth IRA, we guide you through each step of the process. We ensure that your contributions align with current IRA contribution limits and retirement strategies.


IRA Contribution Limits 2024

For the tax year 2024, the IRA contribution limit for both Traditional and Roth IRAs is $6,500, with an additional $1,000 catch-up contribution allowed for those aged 50 or older. Keep in mind that income limits apply to Roth IRAs, and if your income exceeds certain thresholds, you may be ineligible to contribute directly to a Roth IRA.


IRA Contribution Limits 2025

In 2025, the IRA contribution limits are expected to adjust for inflation. We'll provide updated figures when the IRS releases the official guidelines for the year. Stay informed by checking back with us for the most up-to-date information on IRA contribution limits for 2025.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.