How IRAs work and what advantages they offer
An IRA is a retirement savings account with tax benefits


Historically, an IRA, or individual retirement account, is a retirement savings option that you access of your own accord — unlike, say, employer-sponsored options like 401(k) plans or pensions. But in recent years, in an effort to increase Americans' retirement savings efforts, some states have begun to offer IRA enrollment through automatic individual retirement account programs (or auto-IRAs).
These programs "typically require private employers that don't offer workplace retirement plans like 401(k)s to register for state-run plans," and "workers are automatically enrolled in IRAs, often with 3 to 5% of their income deducted from their paychecks," said The New York Times. As of November, such programs are available in 10 states; they will soon be available in seven more, the outlet added, according to the Georgetown University Center for Retirement Initiatives.
You always have the option to open an IRA on your own through a brokerage, bank or credit union. But before you do, it is important to understand how IRAs work and how they compare to other retirement saving options.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
What are IRAs, and how do they work?
IRAs are "retirement accounts for individuals to save pre- or after-tax dollars toward their post-working years" and that, like a 401(k), have "compounding power that can help them grow significantly over time," said Business Insider. A traditional IRA allows your money to grow tax-deferred, meaning you will pay taxes when you withdraw your funds, whereas a Roth IRA allows for tax-free distributions because they are funded with after-tax dollars.
With an IRA, "you contribute funds that can then be invested in a wide range of assets — CDs, stocks, bonds and other top investments," said Bankrate. Unlike a 401(k), you are "not limited to a menu of investments" with an IRA, which "means you can take full control of picking how this account is invested."
However, said Bankrate, "while you can move the money around freely, you may not be able to take it out early without costs," as early withdrawals generally incur penalties. There are also restrictions on how you can contribute to an IRA each year.
While the IRA is "designed primarily for self-employed people who do not have access to workplace retirement accounts such as the 401(k)," said Investopedia, "you can also have an IRA even if you already have a retirement plan at work."
What are the benefits of an IRA?
IRAs can offer a number of advantages. For one, they are "generally more flexible than 401(k)s because they offer a broader range of investment options and greater control over account management," said SmartAsset. Their fees are also "generally lower than 401(k) fees due to the absence of employer-related administrative costs and the ability to shop around for competitive rates."
The tax advantages of IRAs are also notable. "If you contribute to a traditional IRA, you may get a tax deduction on your contributions in the year they are made," said NerdWallet. Meanwhile, though you "do not receive an immediate tax deduction or benefit" with a Roth IRA, "your retirement distributions are tax-free."
Lastly, "IRAs are insured by the Federal Deposit Insurance Corp.," which "covers customer deposits — up to $250,000 per account in most cases — that are held at FDIC-insured banks or savings and loan associations," said Investopedia. This adds a layer of security to your retirement funds.
Is an IRA or a 401(k) better?
The good news here? You don't necessarily have to pick, as you can have both a 401(k) and an IRA.
If you are not ready to start saving doubly and have to choose, a 401(k) "offers more opportunity to increase your retirement savings compared with an IRA, due to the higher annual contribution limits," said NerdWallet. Still, "you could consider investing primarily in an IRA if you don't get an employer match, if you plan to max out your 401(k), or if your 401(k) has narrow investment options or high fees."
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.
-
Twitter: Breaking the Bird – a 'riveting' documentary
The Week Recommends BBC2's 'fascinating' film charts the social media platform's fall from grace
By Irenie Forshaw, The Week UK Published
-
Detentions and hostile treatment: is it safe to visit the US?
The Explainer Spate of interrogations and deportations at US border sparking decline in overseas visitors
By The Week UK Published
-
The financial changes to expect in 'Awful April'
The Explainer As the new financial year begins, it brings changes for bills, wages and tax
By Marc Shoffman, The Week UK Published
-
How to pay off student loans
The explainer Don't just settle for the default repayment plan
By Becca Stanek, The Week US Published
-
Do student loans affect a credit score?
the explainer Repaying loans on time will strengthen your credit — but paying late will hurt it
By Becca Stanek, The Week US Published
-
Do I qualify for student loan forgiveness?
The Explainer There are a number of different pathways to qualification, though each requires strict criteria to be met
By Becca Stanek, The Week US Published
-
Should I consolidate my student loans?
the explainer Consolidate your loans and you will have just one monthly payment to keep track of — but your interest rate may increase
By Becca Stanek, The Week US Published
-
What's a student loan and how does it work?
The Explainer These loans can cover the cost of tuition, housing and textbooks — but they must eventually be repaid, plus interest
By Becca Stanek, The Week US Published
-
How to get student loan forgiveness
the explainer Four options for paying back (less of!) your federal student loans
By Becca Stanek, The Week US Published
-
ABLE accounts: how they work and who can benefit from them
the explainer These state-administered accounts are available to people with disabilities
By Becca Stanek, The Week US Published
-
5 reasons to file your taxes sooner than later
the explainer Many experts recommend filing well ahead of the annual April deadline
By Becca Stanek, The Week US Published