What Is an IRA?
An Individual Retirement Account (IRA) is a tax-advantaged savings vehicle created by the U.S. government to encourage long-term retirement saving. Governed by IRS Publication 590, IRAs allow your investments to grow — either tax-deferred or tax-free — far faster than a regular taxable brokerage account, because you are not paying taxes on dividends, interest, or capital gains as they accumulate each year.
The key difference between IRA types lies in when you pay income tax: before contributing (Roth) or after withdrawing (Traditional). This single distinction drives the fundamental trade-off the calculator helps you evaluate.
Traditional IRA
Tax-deductible contributions. Growth is tax-deferred. Withdrawals taxed as ordinary income in retirement. RMDs begin at age 73.
Roth IRA
After-tax contributions. Tax-free growth and withdrawals. No RMDs during your lifetime. Income limits apply.
SEP IRA
Designed for self-employed individuals and small business owners. Higher contribution limits — up to $72,000 in 2026.
SIMPLE IRA
For businesses with 100 or fewer employees. Employer matching required. Contribution limit: $17,000–$22,250 in 2026.
Traditional IRA
The Traditional IRA is the most widely used retirement account in the United States. Contributions are generally tax-deductible in the year you make them, immediately reducing your taxable income. The invested funds then compound without any annual tax drag until withdrawal.
Key Rules for 2026
- Contribution limit: $7,000 per year ($8,000 if age 50 or older — the $1,000 catch-up contribution).
- Deductibility: Fully deductible if you (and a spouse, if applicable) are not covered by an employer retirement plan. Deductibility phases out at higher incomes if you have a workplace plan.
- Withdrawals: Penalty-free after age 59½. Withdrawals are taxed as ordinary income.
- Required Minimum Distributions (RMDs): Must begin by April 1 of the year following the year you turn 73 (per SECURE 2.0 Act).
- Early withdrawal penalty: 10% plus income tax on distributions before age 59½, with certain exceptions (first-home purchase, education expenses, disability, etc.).
Traditional IRAs are most advantageous when you expect your tax rate in retirement to be lower than it is today — which applies to the majority of earners. By deferring the tax to retirement when income (and thus the marginal rate) is typically lower, you keep more of your money compounding over your working years.
Roth IRA
The Roth IRA flips the tax treatment: you contribute after-tax dollars, but all qualified withdrawals — including decades of investment growth — are completely tax-free. This makes the Roth IRA particularly powerful for younger workers in lower tax brackets today who expect higher rates in the future, as well as for those who want to leave tax-free assets to heirs.
Key Rules for 2026
- Contribution limit: Same as Traditional IRA — $7,000 ($8,000 if 50+).
- Income limits: Phase-out begins at $150,000 MAGI (single) and $236,000 (married filing jointly) for 2026. Above the ceiling, direct contributions are not permitted, though "backdoor Roth" conversions remain an option.
- Withdrawals: Contributions (not earnings) can be withdrawn at any time penalty-free. Qualified distributions of earnings are tax-free after age 59½ with a 5-year holding period satisfied.
- No RMDs: Unlike Traditional IRAs, Roth IRAs are never subject to required minimum distributions during the account holder's lifetime.
- Early withdrawal: Earnings withdrawn before 59½ are subject to income tax plus 10% penalty, with some exceptions.
SEP IRA (Simplified Employee Pension)
SEP IRAs are employer-funded accounts primarily used by the self-employed and small business owners. They function similarly to Traditional IRAs in terms of tax treatment — contributions are pre-tax, growth is tax-deferred, and withdrawals are taxed as ordinary income — but with dramatically higher contribution limits.
Key Rules for 2026
- Contribution limit: The lesser of 25% of net self-employment income (or W-2 compensation) or $72,000 per year. This is nearly ten times the Traditional/Roth IRA limit.
- Eligibility: Must be offered to all eligible employees on the same percentage basis.
- No catch-up contributions: Unlike Traditional and Roth IRAs, SEP IRAs do not allow additional catch-up contributions for those 50 and older.
- Immediate vesting: All contributions are 100% vested immediately.
- RMDs: Same RMD rules as Traditional IRAs — required beginning at age 73.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
SIMPLE IRAs are designed for small businesses with 100 or fewer employees. They have lower administrative overhead than 401(k) plans while still allowing meaningful contributions and mandatory employer matching — making them an attractive option for small employers who want to offer a retirement benefit.
Key Rules for 2026
| Contributor / Age Group | 2026 SIMPLE IRA Limit |
|---|---|
| Employee (under 50) | $17,000 |
| Employee (50–59 or 64+) | $21,000 (+ $4,000 catch-up) |
| Employee (60–63) | $22,250 (+ $5,250 catch-up per SECURE 2.0) |
| Employer match — Option A | Match up to 3% of employee compensation |
| Employer match — Option B | Fixed 2% of all eligible employees' compensation |
- Early withdrawal penalty: 25% if withdrawn within the first 2 years of plan participation — significantly higher than the 10% penalty on other IRAs.
- RMDs: Same rules apply as Traditional IRA — required at age 73.
- Rollover restriction: SIMPLE IRA funds cannot be rolled into a Traditional IRA until after 2 years of participation.
How the IRA Calculator Works
The calculator uses the standard future value (FV) formula for a series of equal annual contributions combined with a lump-sum present value:
Where PV = current balance, PMT = annual contribution, r = annual rate of return, and n = number of years until retirement.
After-Tax Conversion
For a fair comparison, the calculator converts all account types to after-tax values:
- Traditional/SEP/SIMPLE: The retirement balance is multiplied by
(1 − retirement tax rate), reflecting that withdrawals will be taxed as ordinary income. - Roth IRA: Contributions are first reduced by
(1 − current tax rate)(since you invest post-tax dollars), but the balance at retirement is kept in full — no further tax applies to qualified withdrawals. - Regular Taxable Savings: Contributions are after-tax, and the effective growth rate is reduced to approximate the long-term capital gains tax drag (~15%), making this the least tax-efficient option.
IRA vs. 401(k): Key Differences
| Feature | Traditional IRA | 401(k) |
|---|---|---|
| 2026 Contribution Limit | $7,000 ($8,000 ≥50) | $24,500 ($32,500 ≥50) |
| Employer Match | No | Often yes |
| Investment Options | Almost unlimited | Limited to plan menu |
| Where Available | Any financial institution | Through employer only |
| Tax Treatment | Pre-tax; taxed on withdrawal | Pre-tax; taxed on withdrawal |
| RMD Age | 73 | 73 |
You can contribute to both an IRA and a 401(k) in the same tax year, as long as you stay within each plan's respective limits. If your employer offers a 401(k) match, it is generally advisable to contribute at least enough to capture the full match before directing additional dollars to an IRA.
IRA Rollovers and Conversions
Existing employer-sponsored plans — including 401(k)s, 403(b)s, SIMPLE IRAs (after 2 years), and SEP IRAs — can be rolled over directly into a Traditional IRA with no immediate tax consequence. The 60-day rollover rule permits you to receive a distribution and redeposit it within 60 days; however, direct (trustee-to-trustee) rollovers are simpler and avoid withholding complications.
A Roth conversion moves funds from a Traditional IRA (or other pre-tax account) into a Roth IRA. The converted amount is added to your taxable income in the year of conversion. This strategy is popular during lower-income years (e.g., early retirement before Social Security begins) when the tax cost of conversion is minimized.
Investment Options Inside an IRA
Unlike 401(k) plans, which are limited to the investment menu selected by the employer, IRAs can hold almost any publicly traded investment. Common choices include:
- Index Funds & ETFs: Low-cost, diversified, and the most popular choice for IRA investors. S&P 500 index funds have delivered approximately 7–10% annualized returns historically.
- Mutual Funds: Actively managed funds with professional oversight. Higher fees than index funds; performance varies.
- Individual Stocks & Bonds: Direct ownership; higher potential return but significantly higher risk and research burden.
- Robo-Advisors: Automated, algorithm-driven portfolio management. Low cost, suitable for hands-off investors.
- CDs, Annuities, REITs, Precious Metals: Less common but permitted in most IRA accounts.
Self-Directed IRAs (SD-IRA)
A Self-Directed IRA extends the investment universe to include alternative assets: private equity, real estate, hedge funds, cryptocurrency, and tax liens. SD-IRAs are for experienced investors or those working with a qualified professional, as prohibited transactions carry severe tax penalties. Certain assets are never permitted in any IRA, including life insurance policies, S-corporation stock, collectibles, and property used personally by the account holder.
2026 IRA Contribution Limits at a Glance
| IRA Type | Standard Limit | Age 50+ Limit | Age 60–63 Limit |
|---|---|---|---|
| Traditional IRA | $7,000 | $8,000 | $8,000 |
| Roth IRA | $7,000 | $8,000 | $8,000 |
| SEP IRA | 25% of income or $72,000 | Same (no catch-up) | Same (no catch-up) |
| SIMPLE IRA | $17,000 | $21,000 | $22,250 |
Tips to Maximize Your IRA
- Contribute early in the year: Front-loading contributions gives your money more time to compound. A January contribution has 12 extra months of growth versus a December contribution.
- Automate contributions: Set up automatic monthly transfers — $583/month reaches the $7,000 Traditional/Roth IRA limit without requiring a lump sum.
- Use the catch-up: If you are 50 or older, the extra $1,000 per year at 7% over 15 years adds approximately $25,000 to your retirement balance.
- Consider asset location: Place high-growth, high-turnover assets in tax-advantaged accounts like IRAs. Hold tax-efficient assets in taxable brokerage accounts.
- Don't neglect the spousal IRA: A non-working spouse can contribute to their own IRA as long as the working spouse has sufficient earned income — doubling the household's annual IRA contribution capacity.
- Review beneficiaries annually: IRAs pass by beneficiary designation — not your will. Keep designations up to date after major life events.