IRA

Individual Retirement Accounts (IRAs) are personal retirement savings arrangements that provide tax advantages similar to employer-sponsored plans such as 401(k)s. Unlike 401(k)s, which are controlled by employers, IRAs can be opened through banks, brokerages, or investment firms and typically offer a wide range of investment options.

Traditional IRAs

Contributions to a traditional IRA may be tax-deductible depending on the individual’s income, filing status, and whether they or their spouse are covered by an employer retirement plan. Withdrawals from a traditional IRA are taxed as ordinary income. Funds can generally be withdrawn without penalty beginning at age 59½. Early withdrawals are usually subject to both income tax and an additional 10 percent penalty unless a statutory exception applies. Traditional IRAs also require minimum withdrawals once the account holder reaches a certain age, as defined by federal law.

Roth IRAs

Roth IRAs are funded with after-tax contributions. Withdrawals in retirement are tax-free if legal requirements are met. Unlike traditional IRAs, Roth IRAs do not require minimum withdrawals during the account owner’s lifetime. Eligibility to contribute to a Roth IRA is limited by income. Above certain income thresholds, contributions may be reduced or prohibited altogether.

See: IRS Retirement topics - IRA contribution limits

[Last reviewed in October of 2025 by the Wex Definitions Team] 

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