IRAs Explained: Types, Benefits, & Rules of IRAs

2024 IRA Contribution Deadline is April 15, 2025!

Make your contributions now, before it’s too late!

When it comes to saving for retirement, there are few tools as powerful—or as versatile—as an Individual Retirement Account (IRA). Whether you’re just starting to build your nest egg or you’re looking to maximize your savings potential, understanding the ins and outs of IRA accounts can make all the difference. Below, we’ll help you take the next step toward your financial future by exploring the different types of IRAs, potential tax advantages, as well contribution limits and deadlines for IRA accounts.

Basics of IRAs

“IRA” stands for “Individual Retirement Account.” This is a type of financial account or plan that one pays into over time as a way to invest, grow, and save money for retirement. There are different types of IRA accounts, such as Traditional, Roth, SEP, and SIMPLE IRAs, and these accounts or plans can be set up with a variety of institutions, such as banks, life insurance companies, mutual funds, or stockbrokers.¹

Types of IRAs

IRAs come in various types, each designed to fit different employment situations, tax strategies, and contribution limits. Finding the right IRA type for your situation and goals can help optimize retirement savings over time.

Traditional

A traditional IRA is a tax-advantaged savings plan where contributions may be tax deductible and withdrawals are generally taxed.²

The contributions, or money you add to the account, may be partially or fully deductible on yearly tax forms depending on filing status and income.
Generally, the amounts in a traditional IRA (including earnings and gains) are not taxed until you take a distribution (withdrawal) from the account.³

Roth

A Roth IRA is another tax-advantaged savings plan where contributions are not deductible but qualified distributions may be tax free.⁴

Contributions to Roth IRAs are subject to yearly tax.
Since funds are taxes when they are added to the account, qualified distributions (withdrawals) are often tax free. These distributions not only include retirement income (distributions taken after reaching 59 ½ years of age), but also special early distributions, such as to buy or build a first home, experiencing disability, or for certain personal emergencies.⁵

Simplified Employee Pension (SEP) IRA

SEP IRA plans are a type of retirement plan set up by an employer. Contributions are made by the employer directly to an IRA set up for each employee.⁶

The account is set up for employees like a traditional IRA.
- Only the employer contributes to the account
- The employee always has 100% ownership of the SEP-IRA money.
Employers can also set aside money in retirement accounts for themselves if they are an employee of the business as part of SEP IRAs.
Employers must contribute equally for all eligible employees, but can contribute flexible amounts annually.
These plans are available to businesses of any size and can be easily adopted by filling out IRS Form 5305.⁷

Savings Incentive Match Plan for Employees (SIMPLE) IRA

SIMPLE IRA are a type of retirement plan set up by an employer, employees may choose to make salary reduction contributions, and the employer makes matching or nonelective contributions.

The account is set up for employees like a traditional IRA
- Employer contributes either up to a 3% of employee compensation or a 2% nonelective contribution for each employee.
- Employee may elect to contribute to the IRA as well.
- The employee always has 100% ownership of the SIMPLE-IRA money.
These plans are designed for small businesses, generally with fewer than 100 employees.
The plan can be easily adopted by filling out IRS Forms 5304-SIMPLE or 5305-SIMPLE, although the employer can not have any other retirement plans available.⁸

Contribution Limits and Deadlines

Contribution limits for IRAs set the maximum amount that can be deposited into an IRA account each year, and these limits vary based on factors like age, filing status, and income. Deadlines for IRA contributions typically align with the tax filing deadline, usually April 15 of the following year.

Retirement Plan	2024 Limit	Additional Catch-up Contribution (for people 50 and over)	Contribution Deadline for 2024
Traditional & Roth IRA	$7,000	$1,000	April 15, 2025
SIMPLE IRA (Savings Incentive Match Plans for Employees)	$16,000	$3,500	April 15, 2025
SEP IRA (Simple Employee Pension)	$69,000 or 25% of compensation, whichever is smaller.	Not usually allowed	April 15, 2025

Be aware that excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. Therefore, an important part of managing IRA accounts is checking to make sure that the contribution limits aren’t exceeded each year. If there is an excess of contributions, the 6% tax can be avoided by withdrawing the excess contributions by April 15th and any income earned on the excess contributions.⁹

Advantages of IRAs

IRA accounts offer several key advantages for individuals looking to save for retirement.

One of the primary benefits is the tax-advantaged growth. Earnings in a traditional IRA grow tax-deferred until withdrawal, and in a Roth IRA, qualified withdrawals are tax-free.

IRAs also provide flexibility in investment choices, allowing individuals to diversify their portfolio with stocks, bonds, mutual funds, and other assets.

Additionally, contributing to a traditional IRA may lower taxable income for the year, which can reduce an individual’s overall tax burden.

Starting to save for retirement early with IRAs allows for the money to grow. IRA accounts typically will see annual investment gains of around 6%. Over many years, this can lead to substantial amounts of savings. Using IRA calculators can help you see just how much you can potentially earn. We love this one from NerdWallet. Roth IRA Calculator – NerdWallet