What Is an IRA?

IRA stands for individual retirement account. The word that matters is individual: you open it yourself, in your own name, at a brokerage, bank, or robo-advisor, with no employer involved. That is the difference from a workplace plan. You decide to open it, you fund it from your own money, and you control it directly. Anyone with earned income can generally open one, and it stays yours regardless of where you work.

An IRA is a container, not an investment. Opening one does not buy anything by itself; it creates an account with a tax wrapper around whatever you put inside. The government gives that wrapper tax advantages to encourage saving for retirement, and in exchange there are rules: an annual contribution limit, and generally a penalty for withdrawing before age 59 and a half, with some exceptions. The point is to let money grow over decades with less tax drag than a regular taxable brokerage account.

There are a handful of IRA types, but two cover most individual savers. A traditional IRA lets you contribute money that may be tax-deductible in the year you put it in, and you pay income tax later when you withdraw in retirement. A Roth IRA flips the timing: you contribute after-tax money now, and qualified withdrawals in retirement come out tax-free, growth included. Those two are what most people mean when they say IRA.

The rest serve narrower needs. A SEP IRA is an employer-funded account aimed at self-employed people and small business owners, with a much higher contribution ceiling. A SIMPLE IRA is a small-business workplace plan that takes both employee and employer contributions. A rollover IRA is a traditional IRA that holds money moved out of a 401(k) or another employer plan, often when you leave a job, so the savings keep their tax-deferred status instead of being cashed out. The table later in this guide lays the types side by side.

The traditional-versus-Roth choice comes down to one question: do you want the tax break now or later? With a traditional IRA, contributions may be deducted from your taxable income in the year you make them, lowering this year's tax bill, but every dollar you withdraw in retirement is taxed as ordinary income. It can suit people who want a deduction today or expect to be in a lower tax bracket once they stop working.

With a Roth IRA, you get no deduction up front; you contribute money you have already paid tax on. In return, qualified withdrawals in retirement, including all the investment growth, are completely tax-free. That can suit people who expect to be in the same or a higher tax bracket later, or who simply value the certainty of a tax-free pool in retirement. Roth IRAs also carry income limits to contribute directly: for 2026 the ability to contribute phases out between $153,000 and $168,000 of modified adjusted gross income for single filers, and between $242,000 and $252,000 for married couples filing jointly. These figures are for 2026 and change yearly, so verify them with the IRS.

For 2026, the IRS sets the IRA contribution limit at $7,500. That is a combined cap across all of your traditional and Roth IRAs together, not a separate allowance for each account, so splitting money between a traditional and a Roth does not let you contribute more in total. If you are age 50 or older, a catch-up contribution adds $1,100, bringing your 2026 limit to $8,600. You generally need earned income at least equal to what you contribute.

A few related 2026 numbers help put the IRA in context. SEP IRAs allow up to 25% of compensation, capped at $72,000. SIMPLE IRAs allow employee salary deferrals up to $17,000, with a $4,000 catch-up at 50 or older. Traditional IRA deductibility can also be reduced if you or a spouse are covered by a workplace plan and your income is above certain thresholds. All of these limits are for 2026, are adjusted over time, and should be verified with the IRS before you act. Walnut is not a financial or tax advisor, and this is not tax advice.

People often lump IRAs and 401(k)s together, but they are different vehicles. A 401(k) is an employer-sponsored plan offered through your job. You contribute straight from your paycheck, your employer may match part of it, and your investment menu is whatever the plan provides. An IRA is the opposite in setup: there is no employer, you open it yourself at a broker, and you fund it from money you already have.

The two also differ on limits and choice. A 401(k) has a much higher annual contribution limit, $24,500 in 2026 for elective deferrals, so it can hold far more each year, and the employer match is effectively free money the IRA has no equivalent for. An IRA, in exchange for its lower limit, usually offers a far wider universe of investments, nearly any stock, bond, ETF, or fund your broker carries, rather than a short preset list. Many people use both: a 401(k) at work and an IRA on the side. For a deeper comparison, see our IRA vs 401(k) guide.

Because an IRA is a container, opening one is only the first step; nothing grows until you choose what to hold inside. At most brokers an IRA can hold individual stocks, bonds, ETFs, and mutual funds, the same building blocks as a taxable account. The account decides the tax treatment; your holdings decide the returns and the risk. A common approach is broad, low-cost index funds, but the right mix depends on your time horizon and how much volatility you can sit through, which is a personal decision rather than a one-size answer.

This is also why an IRA is not automatically diversified or invested. Money sitting in an IRA as cash is not working until you buy something with it, and which funds you pick matters as much as opening the account in the first place. If you want a starting point for retirement-account holdings, our best ETFs for a Roth IRA guide walks through common low-cost choices, and our how to build a diversified portfolio guide covers the structure. Both are descriptive, not recommendations.

The right type depends on your tax situation, income, and whether you are self-employed, and the contribution limits and income thresholds change every year. The descriptions here are general and educational. Confirm the current rules and your own eligibility with the IRS or a qualified tax professional before contributing; Walnut is not a financial or tax advisor, and this is not tax advice.

Walnut does not open IRAs, give tax advice, or tell you which account to use; it is informational and is not a financial or tax advisor. What it does is help you understand and manage the investments inside an account you already have. If your IRA lives at a brokerage Walnut supports, you can connect it through SnapTrade and then ask questions in plain language about what you actually hold.

You can chat through Claude, ChatGPT, or a built-in assistant to see how each position is doing against the S&P 500, where your funds overlap, and how concentrated or diversified the account is. It is read-only by default, so nothing changes until you decide to trade and approve it yourself. The point is to help you see your own IRA clearly, not to make tax or investment decisions for you.

An IRA is an individual retirement account you open yourself at a broker, separate from any employer, that wraps your investments in a tax advantage meant for long-term saving. The two main types differ on when you pay tax: a traditional IRA may deduct contributions now and tax withdrawals later, while a Roth IRA takes after-tax money now and pays out tax-free in retirement. SEP, SIMPLE, and rollover IRAs cover the self-employed, small businesses, and money moved from a 401(k).

For 2026 the combined contribution limit is $7,500, or $8,600 with the age-50 catch-up, and Roth contributions phase out at higher incomes; verify all figures with the IRS. Unlike a 401(k), an IRA has no employer and a lower limit but a far wider investment menu, and the account does nothing until you choose what to hold inside it. Walnut is informational and is not a financial or tax advisor; this is not tax advice.