How Individual Retirement Accounts (IRAs) Work and When to Use One

What an IRA is and how it differs from a 403(b)

An Individual Retirement Account (IRA) is a savings account you open on your own, not through an employer. Unlike a 403(b), which your school or nonprofit employer sets up for you, an IRA is something you fund yourself—usually with money from your paycheck, self-employment income, or a rollover from another retirement plan. The main trade-off is that you control the account entirely, but you also have to find and manage it yourself.

If you have a 403(b) at work, you can also have an IRA at the same time. Many people do both: they contribute to their employer plan up to the match or a target amount, then open an IRA to save additional money. The two accounts have separate contribution limits, so maxing out one does not affect how much you can put into the other.

IRAs come in two main types: Traditional IRAs and Roth IRAs. The difference is when you pay taxes—upfront with a Roth, or later when you withdraw with a Traditional. Your income level, whether you have access to a workplace plan like a 403(b), and your tax situation now versus in retirement all affect which one makes sense for you.

Key Takeaways

• An IRA is an account you open yourself, separate from any employer plan, and you choose where to invest the money inside it.
• Traditional IRAs let you deduct contributions from your taxes now, but you pay taxes on withdrawals in retirement; Roth IRAs are funded with after-tax money, but withdrawals in retirement are tax-free.
• For 2024, you can contribute up to $7,000 per year to an IRA if you are under 50, or $8,000 if you are 50 or older (these limits change yearly).
• If you have a 403(b) at work and earn above a certain income, you may not be able to deduct a Traditional IRA contribution, but you can always contribute to a Roth IRA.
• You can move money from a 403(b) into an IRA through a rollover, which lets you consolidate accounts and often gives you more investment choices.

Traditional IRA contributions and tax deductions

With a Traditional IRA, you contribute money that may be tax-deductible in the year you make the contribution. If you are not covered by a workplace retirement plan—meaning you have no 403(b), 401(k), or similar plan—you can always deduct the full amount. If you do have a workplace plan, your ability to deduct depends on your income.

For 2024, if you are covered by a 403(b) and your income is below a certain threshold, you can deduct the full contribution. Above that threshold, the deduction phases out gradually, and above a higher threshold, you cannot deduct it at all. The exact income limits change each year and depend on your filing status. You can find the current limits on the IRS website or ask your tax preparer.

Even if you cannot deduct your contribution, you can still put money into a Traditional IRA—you just pay taxes on it now instead of later. This is called a nondeductible contribution. When you withdraw the money in retirement, you will owe taxes only on the growth, not on the amount you already paid taxes on. Tracking nondeductible contributions requires keeping records, so many people find a Roth IRA simpler in this situation.

Roth IRA contributions and tax-free growth

A Roth IRA works in reverse: you contribute money that is not tax-deductible, but the money grows tax-free and you pay no taxes on withdrawals in retirement. This makes a Roth especially valuable if you expect to be in a higher tax bracket later, or if you simply want the certainty of knowing your withdrawals will not be taxed.

Roth contributions are also subject to income limits. If your income is above a certain level, you cannot contribute directly to a Roth IRA. However, there is a workaround called a backdoor Roth: you contribute to a Traditional IRA (which has no income limit), then immediately convert it to a Roth and pay taxes on the conversion. This strategy is common for higher earners and is legal, though it requires careful record-keeping.

One major advantage of a Roth is that you can withdraw your contributions (not the earnings) at any time without penalty or taxes. This makes a Roth a more flexible emergency fund than a Traditional IRA, though it is still meant for retirement savings.

Annual contribution limits and catch-up contributions

For 2024, you can contribute up to $7,000 per year to an IRA if you are under age 50. If you are 50 or older, you can contribute an additional $1,000 as a catch-up contribution, for a total of $8,000. These limits apply to the combined total across all IRAs you own—if you have both a Traditional and a Roth, the $7,000 limit covers both together, not each one separately.

The contribution limit changes most years to keep pace with inflation. The IRS announces the new limit in October or November for the following year. If you are self-employed or have other income sources, you may also be able to contribute to a SEP IRA or Solo 401(k), which have much higher limits, but those are separate account types.

You can contribute to an IRA for a given tax year until the tax filing deadline the following year—usually April 15. For example, you can contribute to your 2024 IRA until April 15, 2025. This gives you a window to catch up if you did not contribute earlier in the year.

Rolling over a 403(b) into an IRA

If you leave your job or retire, you can move money from your 403(b) into an IRA through a rollover. This is often a good move because IRAs typically offer more investment choices than employer plans. Instead of being limited to the 10 or 20 funds your 403(b) offers, you can invest in thousands of stocks, bonds, mutual funds, and exchange-traded funds through an IRA.

A rollover is straightforward: you contact your 403(b) plan administrator and ask for a rollover form. You can either have them send the money directly to your new IRA (a direct rollover, which is cleanest), or have them send you a check that you then deposit into the IRA within 60 days (an indirect rollover). The direct method avoids the risk of missing the 60-day deadline and triggering taxes and penalties.

When you roll over a 403(b) into a Traditional IRA, the money stays in a Traditional IRA. If you want to convert it to a Roth, you can do that separately, though you will owe taxes on the amount converted. Some people do this gradually over several years to spread out the tax bill.

Withdrawal rules and early withdrawal penalties

With a Traditional IRA, you must start taking withdrawals at age 73 (as of 2023; this age has been rising). These are called Required Minimum Distributions (RMDs), and the IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the full amount, you owe a penalty on the shortfall.

If you withdraw money before age 59½, you generally owe a 10% early withdrawal penalty plus income taxes on the amount withdrawn. There are exceptions—you can withdraw penalty-free for a first home purchase (up to $10,000 lifetime), education expenses, medical bills, or certain other hardships—but these are narrow. A Roth IRA is more flexible: you can withdraw your contributions anytime without penalty, though earnings are still subject to the early withdrawal penalty.

At age 59½, you can withdraw from either type of IRA without the 10% penalty, though you still owe income taxes on Traditional IRA withdrawals. Roth withdrawals are tax-free if the account has been open for at least five years and you are 59½ or older.

Choosing between a Traditional and Roth IRA

The choice between Traditional and Roth depends on your current tax bracket, your expected tax bracket in retirement, and whether you want to reduce your taxes now or in retirement. If you are in a high tax bracket now and expect to be in a lower one in retirement, a Traditional IRA saves you more money. If you expect to be in a higher bracket later, or you simply want tax-free withdrawals, a Roth makes more sense.

Income limits also play a role. If you earn too much to contribute to a Roth directly, a backdoor Roth is an option. If you earn too much to deduct a Traditional IRA contribution and you have a 403(b) at work, you might choose a Roth instead of a nondeductible Traditional IRA, since the Roth offers tax-free growth.

Many people use both: they contribute to their 403(b) at work (which may be Traditional or Roth, depending on the plan), then open an IRA to save additional money. Some contribute to a Traditional IRA for the tax deduction, then convert part of it to a Roth in lower-income years. There is no single right answer—it depends on your situation.

Where to open an IRA and how to invest the money

You can open an IRA at a bank, credit union, brokerage firm, or investment company. Common providers include Vanguard, Fidelity, Charles Schwab, and many others. Each offers different investment options and fee structures. Some charge annual account fees; others do not. Some offer low-cost index funds; others focus on actively managed funds or individual stocks.

Once you open the account, you decide how to invest the money inside it. You might choose a target-date fund that automatically adjusts from stocks to bonds as you approach retirement, or you might build your own mix of stocks and bonds. The investments you choose inside the IRA are separate from the IRA itself—the IRA is just the tax-advantaged wrapper.

If you are unsure where to start, many providers offer simple portfolios or robo-advisor services that build a diversified mix for you based on your age and risk tolerance. You can also speak with a financial advisor, though be aware that some charge fees and others work on commission.

Frequently Asked Questions

Can I have both a 403(b) and an IRA at the same time?

Yes. You can contribute to both in the same year, and the contribution limits are separate. However, if you have a 403(b) and earn above a certain income, you may not be able to deduct a Traditional IRA contribution. A Roth IRA has its own income limits, but they are different from the Traditional IRA limits.

What happens to my IRA if I change jobs?

Your IRA stays with you—it is not tied to your employer. You can leave it where it is, move it to a new provider, or roll it into your new employer's plan if the plan accepts rollovers. You can also roll a new employer plan into your existing IRA when you leave that job.

Can I withdraw from my IRA before retirement?

You can withdraw from a Roth IRA anytime without penalty, as long as you are withdrawing contributions, not earnings. With a Traditional IRA, early withdrawals before age 59½ trigger a 10% penalty plus income taxes, with narrow exceptions for first-time home purchases, education, and medical hardship.

What is a backdoor Roth and why would I use it?

A backdoor Roth is a strategy for high earners who cannot contribute directly to a Roth IRA due to income limits. You contribute to a Traditional IRA, then convert it to a Roth and pay taxes on the conversion. It is legal and common, but requires careful record-keeping to avoid complications.

Do I have to take withdrawals from my IRA at a certain age?

Yes. With a Traditional IRA, you must start taking Required Minimum Distributions at age 73. With a Roth IRA, you do not have to take distributions during your lifetime, though your heirs will have to take distributions after you pass away.