In 2024, a 28-year-old software developer named Alex opened a Roth IRA at Fidelity with $50. Not $5,000. Not $500. Fifty dollars, transferred from a checking account on a Tuesday evening. He picked a target-date fund, set up a $200 monthly auto-transfer, and went back to watching YouTube.
That account now holds about $5,100. Not life-changing yet. But if Alex keeps going, contributing $7,500 per year at a 7% average return, he'll have roughly $1.1 million by age 65. All from a decision that took him nine minutes.
An IRA is the most accessible retirement account in America, and 43.8% of U.S. households own one [1]. Here's everything you need to know to open yours.
30-Second Summary: An IRA (Individual Retirement Arrangement) is a personal, tax-advantaged account you open at a brokerage. Traditional IRAs give you a tax break now; Roth IRAs give you tax-free money later. The 2026 limit is $7,500 ($8,600 if you're 50+). You pick the investments inside it.
What Is an IRA?
An IRA is a tax-advantaged "basket" that holds investments. It is not, itself, an investment. This is the most common misconception about IRAs, and it leads people to open one at a bank, deposit cash, and wonder why it's earning 0.5%.
An IRA at a brokerage like Fidelity, Vanguard, or Schwab lets you buy stocks, bonds, ETFs, mutual funds, and more inside the account. The IRA wrapper provides the tax benefit. What you put inside the wrapper determines your returns.
There are $18.9 trillion sitting in IRAs across the country [2]. The average balance for Baby Boomers is $257,002. For Gen Z? Just $6,672 [3]. The gap isn't about age alone. It's about time in the market.
Traditional IRA vs. Roth IRA
These are the two main types, and they work in opposite directions.
| Feature | Traditional IRA | Roth IRA |
|---|
| Tax break | Deduction when you contribute | Tax-free withdrawals in retirement |
| Contributions | Pre-tax (if deductible) | After-tax |
| Growth | Tax-deferred | Tax-free |
| Withdrawals in retirement | Taxed as ordinary income | Tax-free (if qualified) |
| Required minimum distributions | Yes, starting at age 73 | No RMDs for the original owner |
| 2026 contribution limit | $7,500 ($8,600 if 50+) | $7,500 ($8,600 if 50+) |
| Income limits for contributions | None (but deductibility has limits) | Yes: $153k–$168k single; $242k–$252k married |
The Tax Deduction Question
Everyone can contribute to a Traditional IRA. But whether you can deduct that contribution depends on two things: your income and whether you have a retirement plan at work.
If you don't have a 401(k) or other workplace plan: Your Traditional IRA contribution is fully deductible regardless of income. Simple.
If you do have a workplace plan: Deductibility phases out based on your Modified Adjusted Gross Income (MAGI):
| Filing Status | Full Deduction Below | Partial Deduction | No Deduction Above |
|---|
| Single (covered by plan at work) | $81,000 | $81,000–$91,000 | $91,000 |
| Married filing jointly (covered spouse) | $129,000 | $129,000–$149,000 | $149,000 |
| Married (spouse covered, you're not) | $242,000 | $242,000–$252,000 | $252,000 |
2026 figures. Source: IRS [4].
A Worked Example
Alex earns $72,000 as a single filer and has a 401(k) at work. He contributes $7,500 to a Traditional IRA for 2026.
His income ($72,000) is below the $81,000 threshold, so he can deduct the full $7,500.
Tax savings: $7,500 × 22% marginal rate = $1,650 in federal tax savings this year [5].
Now the Roth comparison. If Alex chose a Roth IRA instead, he'd pay that $1,650 in taxes now. But the $7,500 grows at 7% for 30 years, reaching roughly $57,091. In retirement, he withdraws all of it (including the $49,591 in growth) completely tax-free. Zero taxes on nearly fifty thousand dollars of investment gains.
Which is better? It depends on whether Alex expects to pay higher or lower taxes in retirement. There's no universally correct answer. That's why we wrote separate deep dives on the Roth IRA and on IRA contribution limits.
Other IRA Types
Beyond Traditional and Roth, there are specialized IRAs for specific situations:
SEP IRA: For self-employed individuals and small business owners. Allows contributions up to 25% of compensation or $72,000 (2026), whichever is less. Only the employer contributes. We cover this in our SEP IRA guide.
SIMPLE IRA: For businesses with 100 or fewer employees. Employees can defer up to $17,000 (2026), and employers must match. Details in our SIMPLE IRA article.
Spousal IRA: Not a separate account type, but a rule. If your spouse doesn't earn income, you can contribute to an IRA in their name using your earned income, as long as you file jointly and earn enough to cover both contributions.
How to Open an IRA (in 15 Minutes)
Opening an IRA is easier than opening a bank account. Here's the real process:
Step 1: Choose a brokerage. The big three are Fidelity, Vanguard, and Charles Schwab. All offer $0 account fees, $0 trading commissions, and excellent low-cost index funds. Pick whichever has the website you find least annoying. (Seriously, that's a valid criterion.)
Step 2: Choose Traditional or Roth. If your income qualifies and you're earlier in your career, Roth is typically the stronger choice. If you're in a high tax bracket now and expect a lower one later, Traditional may save you more.
Step 3: Open the account online. You'll need your Social Security number, a bank account for funding, and about 10 minutes. The brokerage walks you through it.
Step 4: Fund it. Transfer money from your checking account. You can start with as little as $1 at Fidelity or Schwab. Set up automatic monthly transfers so you don't have to think about it.
Step 5: Invest the money. This is the step people skip. The money sits in a "settlement fund" (basically cash) until you buy something. A single target-date fund (like Fidelity Freedom Index 2060) or a total market index fund (like Vanguard's VTI) is a perfectly reasonable starting point.
Don't overthink the brokerage choice. The difference between Fidelity, Vanguard, and Schwab is marginal. What matters is that you open the account and actually invest.
IRA vs. 401(k): They're Not Competing
You can (and usually should) have both. The contribution limits are separate. You can max out a 401(k) at $24,500 and an IRA at $7,500 in the same year.
The strategy most financial planners recommend:
- Contribute enough to your 401(k) to get the full employer match.
- Max out your Roth IRA.
- Go back and increase your 401(k) contribution toward the maximum.
This order makes sense because the IRA typically offers better investment choices and lower fees than most employer 401(k) plans. But the 401(k) match is free money, so it comes first.
The Biggest Mistake: Treating It Like a Savings Account
An IRA at a bank is usually limited to CDs or savings accounts. That might earn you 4% in a good year. An IRA at a brokerage, invested in a diversified stock index fund, has historically averaged about 10% annually before inflation.
The difference over 30 years on a $7,500 annual contribution:
| Growth Rate | Value at Year 30 |
|---|
| 1% (savings account) | $262,000 |
| 4% (CDs) | $420,000 |
| 7% (balanced portfolio) | $708,000 |
| 10% (stock index) | $1.23 million |
You're leaving roughly $800k on the table by choosing a bank IRA over a brokerage IRA. That's not a rounding error. That's a retirement.
To see how these numbers change with your specific contribution amount and timeline, use our compound interest calculator.
Required Minimum Distributions
Traditional IRAs require you to start taking withdrawals at age 73 (rising to 75 for those born in 1960 or later). These Required Minimum Distributions (RMDs) are calculated using IRS life expectancy tables. Miss one, and the penalty is 25% of the amount you should have withdrawn, reducible to 10% if corrected within two years [6].
Roth IRAs have no RMDs during the original owner's lifetime. This makes them powerful estate planning tools: the money can sit and grow tax-free for your entire life if you don't need it.
Your Next Move
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If you don't have an IRA: Open one at Fidelity, Vanguard, or Schwab today. Fund it with whatever you can, even $50. Set up a monthly auto-transfer.
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If you have an IRA but it's sitting in cash: Buy a target-date fund or a total stock market index fund. The cash isn't working for you.
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If you're unsure about Traditional vs. Roth: If your MAGI is under $81,000 (single) and you have a 401(k), you can fully deduct a Traditional IRA. If you're under 40 and in the 22% bracket or lower, Roth is probably the better long-term bet.
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If you're wondering about rollovers: Our IRA rollover guide covers the rules and tax traps.
For an overview of retirement planning strategies beyond individual accounts, check out our guide on building a FIRE plan.
References
- Investment Company Institute. (2025). The Role of IRAs in US Households' Saving for Retirement, 2024. ICI.org. https://www.ici.org/research/stats/retirement
- Investment Company Institute. (2026). Retirement Assets Total $48.1 Trillion in Third Quarter 2025. ICI.org. https://www.ici.org/statistical-report/ret_25_q3
- Fidelity Investments. (2025). Average retirement savings by age. Fidelity.com. https://www.fidelity.com/learning-center/smart-money/average-retirement-savings-by-age
- Internal Revenue Service. (2025). 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500. IRS.gov. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
- Fidelity Investments. (2025). Federal tax brackets. Fidelity.com. https://www.fidelity.com/tax-information/tax-brackets
- Bankrate. (2025). IRA Required Minimum Distribution (RMD) Table 2025-2026. Bankrate.com. https://www.bankrate.com/retirement/ira-rmd-table/
