An IRA, or Individual Retirement Account, is a tax-advantaged account that helps you invest for retirement. Unlike a 401(k), which you get through an employer, an IRA is an account you open on your own. You choose where to open it, what to invest in, and how much to contribute each year, up to the limits set by the IRS.
Despite being one of the most powerful retirement savings tools available, only about 18% of working Americans currently have an IRA. That means the vast majority of people are missing out on tax advantages that could make a significant difference over a career of investing.
This guide covers how IRAs work, the differences between Traditional, Roth, and SEP IRAs, the 2026 contribution and income limits, how IRAs compare to 401(k)s, and how to open one.
How an IRA works
When you contribute money to an IRA, that money is invested in assets you choose, typically ETFs, index funds, stocks, bonds, or mutual funds. Your investments have the potential to grow over time, and depending on the type of IRA, you receive tax benefits either when you contribute or when you withdraw in retirement.
The IRS sets annual contribution limits, income thresholds that affect eligibility or deductibility, and rules about when and how you can withdraw your money. Understanding these rules is the key to using an IRA effectively.
For 2026, the IRS has set the IRA contribution limit at $7,500 for people under 50. If you’re 50 or older, you can contribute an additional $1,100 in catch-up contributions, bringing the total to $8,600.
Types of IRAs: Traditional, Roth, and SEP
Traditional IRA
A traditional IRA lets you contribute pre-tax or tax-deductible dollars, depending on your income and whether you have access to an employer-sponsored retirement plan. Your investments offer tax-deferred growth potential, meaning you don’t pay taxes on gains, if any, until you withdraw the money in retirement. At that point, withdrawals are taxed as ordinary income.
The tax deduction is the primary benefit. If you qualify for the full deduction, your contribution reduces your taxable income for the year. For example, a $7,500 contribution in the 22% tax bracket saves you $1,650 in taxes that year.
Traditional IRAs have required minimum distributions (RMDs) starting as early as age 73, per the SECURE 2.0 Act. This means you must begin withdrawing a minimum amount each year, whether you need the money or not.
Roth IRA
A Roth IRA works differently. Contributions are made with after-tax dollars, so there’s no upfront tax deduction. But qualified withdrawals in retirement are completely tax-free, including all the investment gains your account has accumulated over the years (if any).
Roth IRAs have no required minimum distributions during the account owner’s lifetime (as of 2024, per SECURE 2.0). This makes them particularly valuable for people who want flexibility in retirement or who want to leave assets to heirs.
The trade-off is income eligibility. In 2026, the ability to contribute to a Roth IRA phases out for single filers with a modified adjusted gross income (MAGI) between $153,000 and $168,000, and for married couples filing jointly between $242,000 and $252,000. If your income exceeds these limits, you can’t contribute directly to a Roth IRA, though the backdoor Roth strategy (covered below) may be an option.
For younger investors who expect to be in a higher tax bracket later in life, a Roth IRA can be the stronger choice. You pay taxes now at your current tax rate and withdraw tax-free later.
SEP IRA
A SEP IRA (Simplified Employee Pension) is designed for self-employed individuals and small business owners. Contribution limits are much higher than Traditional or Roth IRAs. For 2026, you can contribute up to 25% of your net self-employment income, up to a maximum of $70,000.
SEP IRAs follow the same tax rules as Traditional IRAs: contributions are tax-deductible, growth, if any, is tax-deferred, and withdrawals in retirement are taxed as income.
Roth IRA vs. Traditional IRA: how they compare
The main difference between a Roth IRA and a Traditional IRA is when you pay taxes. Here’s a side-by-side comparison:
| IRA type | Traditional IRA | Roth IRA |
| Tax benefit | Contributions may be tax-deductible | Qualified withdrawals are tax-free |
| Taxes on withdrawals | Taxed as ordinary income | Tax-free (if qualified), contributions can be withdrawn at any time without penalty or taxes |
| 2026 contribution limit | $7,500 ($8,600 for 50+) | $7,500 ($8,600 for 50+) |
| Income limits | Deduction may be limited based on income and employer plan access | Phase-out: $153K–$168K (single), $242K–$252K (married filing jointly) |
| Required minimum distributions | Yes, starting as early as age 73 | No RMDs during owner’s lifetime |
| Early withdrawal penalty | 10% before age 59½ (with exceptions) | Contributions can be withdrawn anytime, penalty-free. Earnings subject to 10% penalty before 59½ or if account opened less than 5 years |
| Best for | People who want a tax deduction now and expect to be in a lower tax bracket in retirement | People who expect to be in a higher tax bracket in retirement and want tax-free growth potential |
Should you open an IRA if you already have a 401(k)?
Yes. An IRA and a 401(k) serve different roles, and you can contribute to both. Here’s how they compare:
| IRA | 401(k) | |
| Who opens it | You | Your employer |
| 2026 contribution limit | $7,500 ($8,600 for 50+) | $24,500 ($32,500 for 50+; $35,750 for ages 60–63) |
| Employer match | Some platforms offer a match (Acorns Later offers up to 3%) | Many employers match a percentage of contributions |
| Investment choices | Varies by provider; typically broader selection | Limited to plan’s menu of funds |
| Tax treatment | Traditional (tax-deductible) or Roth (tax-free withdrawals) | Traditional (pre-tax) or Roth 401(k) (after-tax) |
The most common strategy is to contribute enough to your 401(k) to get the full employer match (that’s an immediate return on your money), then contribute to an IRA for the additional tax advantages and broader investment options. If you still have money left to invest after maxing out your IRA, go back to the 401(k) and increase contributions there.
If you’re leaving a job, you may also want to consider a 401(k) rollover into an IRA, which lets you consolidate your retirement accounts and potentially access a wider range of investments.
2026 IRA income limits
Your income affects whether you can contribute to a Roth IRA and whether your Traditional IRA contributions are tax-deductible.
Roth IRA income phase-out (2026):
| Filing status | Full contribution | Phase-out range | No contribution |
| Single / Head of household | Under $153,000 | $153,000 – $168,000 | Over $168,000 |
| Married filing jointly | Under $242,000 | $242,000 – $252,000 | Over $252,000 |
Traditional IRA deduction phase-out (2026, if covered by a workplace plan):
| Filing status | Full deduction | Phase-out range | No deduction |
| Single | Under $81,000 | $81,000 – $91,000 | Over $91,000 |
| Married filing jointly (contributor covered by plan) | Under $129,000 | $129,000 – $149,000 | Over $149,000 |
| Married filing jointly (contributor NOT covered, spouse IS) | Under $242,000 | $242,000 – $252,000 | Over $252,000 |
If neither you nor your spouse is covered by a workplace retirement plan, your Traditional IRA contributions are fully deductible regardless of income.
What is a backdoor Roth IRA?
If your income exceeds the Roth IRA contribution limits, you may be able to use a strategy known as a backdoor Roth IRA. This involves contributing to a Traditional IRA (there are no income limits for contributions, only for the tax deduction) and then converting those funds to a Roth IRA.
The conversion triggers current taxes on any pre-tax amounts or gains, but once the money is in the Roth, it offers tax-free growth potential and qualified withdrawals are tax-free in retirement. This strategy is most straightforward when you have other existing funds to pay the current taxes and don’t have other pre-tax IRA balances, which can complicate the tax treatment of the conversion (known as the pro-rata rule).
The tax implications can be nuanced. Consult a tax professional before executing this strategy.
Early withdrawals and penalties
Money in an IRA is intended for retirement. If you withdraw from a Traditional IRA before age 59½, you’ll generally owe income tax plus a 10% early withdrawal penalty on the amount withdrawn.
Roth IRAs are more flexible. You can withdraw your contributions (not earnings) at any time without taxes or penalties, since you already paid taxes on those dollars. Earnings withdrawn before 59½ may be subject to the 10% penalty and current taxes unless an exception applies.
Common exceptions to the 10% penalty include: first-time home purchase (up to $10,000 lifetime), qualified education expenses, certain medical expenses, and substantially equal periodic payments (SEPP/72(t) distributions).
Late payments and bankruptcies remain on credit reports for different periods, but withdrawing from an IRA early has its own long-term cost: the money you take out stops compounding.
How to open an IRA
Opening an IRA takes a few minutes. Here’s the process:
Step 1: Choose a provider. You can open an IRA through a traditional brokerage, a robo-advisor, or a bank. Robo-advisors like Acorns Later build and manage a diversified portfolio for you based on your investor profile. Self-directed brokerages give you full control over your investment selections.
Step 2: Choose your IRA type. Choose the best account type (Traditional, Roth, or SEP) based on your income, tax situation, and retirement timeline. If you’re unsure, and are choosing Acorns as your provider, Acorns recommends the type based on your responses to a few questions about your financial situation.
Step 3: Fund your account. You can start with any amount. Set up recurring contributions to build the habit. Automating deposits on each payday is one of the most effective ways to consistently contribute.
Step 4: Choose your investments. If you’re using a robo-advisor, your money is automatically invested in to a diversified portfolio. If you’re self-directing, consider starting with low-cost, diversified investments like index ETFs.
The Acorns Later IRA match. Acorns is one of the few platforms that matches your IRA contributions. Silver Plan customers receive a 1% match on new contributions during their first year, and Gold Plan customers receive a 3% match. If a Gold plan customer contributes the full $7,500 limit, they could get $225 in matched contributions. The Gold Plan subscription costs $144/year, so the match alone produces a net gain of $81 before any market returns. For a full comparison of Acorns plans, see Acorns plans and pricing.
Open an IRA with Acorns Later and get up to a 3% match on new contributions.
Why an IRA matters for your retirement
An IRA gives you tax advantages that a regular investment account doesn’t. There isn’t one IRA type that’s better than the other. What’s most important is making sure you open an account that fits your current financial situation and meets the IRS eligibility requirements.
The earlier you start, the more time your money can tap into compounding, where your money earns returns and those returns start earning their own returns. If you contributed $7,500 per year starting at age 25, with a 10% average annual return, it would grow to over $3.5 million by age 65. The total contributions you would’ve made over those 40 years would only be $300,000. The rest is compounding.
Even if you can’t max out your contributions, any amount you invest in an IRA benefits from the same tax advantages. Starting with $50 or $100 per month is far better than waiting until you can afford the full $7,500. For guidance on how much to set aside, see our guide on how much to invest for retirement.
Investing involves risk, including loss of principal. Past performance does not guarantee future results. No level of diversification or asset allocation can ensure profits or guarantee against losses.
Want to learn more about Acorns Later? Compare Acorns plans to find the IRA for you.
Frequently asked questions
How much can I contribute to an IRA in 2026?
The 2026 IRA contribution limit is $7,500 for people under 50. If you’re 50 or older, you can contribute an additional $1,100 in catch-up contributions, for a total of $8,600. This limit applies to your combined contributions across all Traditional and Roth IRAs you own.
These limits are set by the IRS and adjusted periodically for inflation. The $1,100 catch-up amount reflects a SECURE 2.0 Act provision that ties catch-up contributions to annual cost-of-living adjustments.
What is the difference between a Roth IRA and a traditional IRA?
The main difference is when you pay taxes. With a Traditional IRA, contributions may be tax-deductible now, but withdrawals in retirement are taxed as ordinary income. With a Roth IRA, you contribute after-tax dollars, but qualified withdrawals in retirement are completely tax-free.
Roth IRAs also have no required minimum distributions during the account owner’s lifetime, while Traditional IRAs require withdrawals starting as early as age 73. Roth IRAs have income limits for eligibility; Traditional IRAs do not have income limits for contributions (only for the tax deduction).
Can I have both a 401(k) and an IRA?
Yes. You can contribute to both a 401(k) and an IRA in the same year. The contribution limits are separate: $24,500 for a 401(k) and $7,500 for an IRA in 2026. Having a 401(k) does not prevent you from opening or contributing to an IRA.
However, if you (or your spouse) are covered by a workplace retirement plan, your ability to deduct Traditional IRA contributions may be limited based on your income. Roth IRA eligibility is based on income regardless of workplace plan access. Many financial experts recommend contributing enough to your 401(k) to get the employer match, then funding an IRA.
What happens if I withdraw from my IRA early?
If you withdraw from a Traditional IRA before age 59½, you’ll generally owe income taxes plus a 10% early withdrawal penalty. For Roth IRAs, you can withdraw your contributions at any time without taxes or penalties, but early withdrawals of earnings may be subject to taxes and the 10% penalty.
There are exceptions to the penalty, including first-time home purchases (up to $10,000), qualified education expenses, and certain medical costs. Even with exceptions, early withdrawals reduce the amount that otherwise would be available to compound over time, which can significantly impact your retirement balance.
What is a backdoor Roth IRA?
A backdoor Roth IRA is a strategy for high-income earners who exceed the Roth IRA income limits. It involves contributing to a Traditional IRA (which has no income limit for contributions) and then converting those funds to a Roth IRA. The conversion triggers current taxes on any pre-tax amounts, but once in the Roth, the money has tax-free growth potential.
The tax implications can be complex, especially if you have existing pre-tax IRA balances. It is generally suggested to pay any related taxes with separate funds. Consult a tax professional to determine whether it makes sense for your situation.
Does Acorns offer an IRA?
Yes. Acorns Later is Acorns’ IRA product, available on all subscription plans. It supports Traditional, Roth, and SEP IRAs. Acorns recommends the IRA type based on your financial situation, and your contributions are invested in a diversified ETF portfolio that’s automatically managed and rebalanced.
Acorns also offers an IRA match: Silver Plan customers receive a 1% match on new contributions during their first year, and Gold Plan customers receive a 3% match. On the 2026 maximum contribution of $7,500, a Gold customer could receive $225 in matched contributions.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.
Investment advisory products and services offered by Acorns Advisers, LLC (“Acorns”), an SEC Registered Investment Adviser. Brokerage products and services are provided by Acorns Securities, LLC, an SEC registered broker-dealer, Member FINRA/SIPC.
All IRA contribution limits, income phase-out ranges, and catch-up contribution amounts cited in this article are based on IRS Notice 2025-67 for the 2026 tax year. These figures are subject to annual adjustment. Consult IRS.gov or a qualified tax professional for the most current information.
Effective March 26, 2025, customers who open an Acorns Gold or Acorns Silver subscription plan or upgrades to an Acorns Gold or Silver subscription plan can opt into the Acorns Later Match feature and receive either a 3% or 1% IRA match, respectively, on new contributions made to an Acorns Later account during the first year subscribed to these subscription plans. All Later funds for customers must be held in an Acorns Later account for at least four years to keep the earned IRA match.
The ETFs comprising the Acorns portfolios charge fees and expenses that will reduce a customer’s return. Investors should read each fund’s prospectus and consider the investment objectives, risks, charges and expenses of the funds carefully before investing.
Acorns Later is an Individual retirement account consisting of a Traditional, ROTH or a SEP IRA selected for customers based on investor profile questionnaire answers.
For informational purposes only. This is solely intended to provide notification of an available product or service. This is not a recommendation to buy, sell, hold, or roll over any asset, adopt an investment strategy, or use a particular account type. This information does not consider the specific investment objectives, tax and financial conditions or particular needs of any specific person. Investors should discuss their specific situation with their financial professional.
The calculation is for illustrative purposes only and assumes a 10% fixed annual rate of return with $7,500 annual contributions over a 40-year period. 10% annual return was selected as an arbitrary figure to show the potential of long-term investing and compound returns. Such results do not predict or represent the performance of any Acorns portfolio and do not take into consideration economic or market factors which can impact performance. Actual customers will achieve investment results materially different from those portrayed.
Despite being a powerful retirement savings vehicle, only about 18% of working Americans have an individual retirement account (IRA), according to U.S. Census Bureau data.
Ben Luthi is a freelance writer who specializes in a number of personal finance topics, including investing, saving, budgeting, consumer credit, travel, credit and more.
