Saving money for retirement is something many people put off because they think they don’t earn enough or don’t know where to begin. However, you don’t need to be wealthy to start preparing for your future. One way to save money while receiving possible tax benefits is by opening an Individual Retirement Account, commonly called an IRA.
An IRA allows you to put money aside for retirement and may help you reduce your income taxes, depending on the type of account you choose. Understanding how these accounts work can help you make better decisions about your savings and financial future.
What Is an IRA?
An IRA, or Individual Retirement Account, is a special account designed to help people save money for retirement. Unlike a regular savings account, an IRA offers certain tax benefits. Depending on the account, you may be able to lower your taxable income today or withdraw money tax-free when you retire.
You can open an IRA through a bank, credit union, or investment company. You don’t need an employer to open a personal IRA, and you can have one even if you already participate in a retirement plan at work.
The money inside your IRA can earn interest or be invested in things like stocks, bonds, and mutual funds. Over time, these investments may help your retirement savings grow, although investments can also lose value.
How Does an IRA Work?
An IRA works by allowing you to regularly contribute money to an account that you plan to use during retirement. For example, imagine you decide to save $100 every month. After one year, you would have contributed $1,200. If you continue saving for several years, your account could grow through additional contributions and investment earnings.
The longer you save, the more time your money has the opportunity to grow. One important thing to understand is that an IRA is not an investment itself. It is an account that can hold different types of savings and investments.
Traditional IRA vs. Roth IRA: What’s the Difference?
There are two common types of personal IRAs: Traditional IRAs and Roth IRAs. Both help you save for retirement, but they offer different tax benefits.
Traditional IRA
A Traditional IRA may allow you to deduct the money you contribute from your taxable income. For example, suppose you earn $45,000 per year and contribute $3,000 to a Traditional IRA. If you qualify for the full deduction, your federal taxable income could be reduced by $3,000.
This doesn’t mean you receive $3,000 back from the IRS. It means you may pay income taxes on a smaller amount of income. Your money generally grows without being taxed each year. However, when you withdraw taxable money during retirement, you usually pay income taxes on those withdrawals.
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Roth IRA
A Roth IRA works differently. You contribute money that has already been taxed, meaning you don’t receive an income tax deduction for your contributions. The main benefit comes later. If you follow the IRS requirements, your retirement withdrawals, including investment earnings, can be completely tax-free.
For example, if you contribute $3,000 to a Roth IRA, you won’t receive a deduction on your current tax return. However, that money could grow over the years, and qualified withdrawals during retirement would not be subject to federal income taxes. Roth IRAs also have income limits that may affect whether you can contribute.
How Much Can You Contribute to an IRA in 2026?
The IRS sets annual limits on how much money you can contribute to Traditional and Roth IRAs.
For the 2026 tax year:
- Under age 50: Up to $7,500
- Age 50 or older: Up to $8,600
These limits apply to your combined contributions to Traditional and Roth IRAs, not separately to each account. You generally must have eligible earned income to contribute, and your contribution cannot exceed that income. Special rules may apply to married couples.
For comparison, the contribution limits for the 2025 tax year were $7,000 for people under 50 and $8,000 for those age 50 or older.
Can an IRA Help You Pay Less in Income Taxes?
Yes, an IRA can provide valuable tax benefits, but the amount you save depends on your financial situation. Traditional IRA contributions may lower your taxable income if you qualify for a deduction. Your eligibility depends on factors such as your income, filing status, and whether you or your spouse have a retirement plan through work.
Roth IRA contributions don’t reduce your current taxable income, but qualified withdrawals in retirement can be tax-free. This is why it’s important to understand the differences before choosing an account. The IRA that provides the greatest benefit today may not necessarily be the one that provides the greatest benefit during retirement.
Can You Withdraw Money From an IRA Before Retirement?
You can withdraw money from an IRA, but taking it out too early may create additional taxes. For Traditional IRAs, withdrawals made before age 59½ generally may be subject to regular income taxes and an additional 10% early withdrawal tax. There are exceptions for certain situations, including some education expenses, qualifying first-time home purchases, and other circumstances allowed by the IRS.
Roth IRAs have different withdrawal rules. You can generally withdraw your original contributions at any time without paying taxes or penalties. However, withdrawing investment earnings early may result in taxes or penalties.
Before withdrawing retirement savings, it’s important to understand the possible tax consequences.
Do You Need an IRA If You Already Have a 401(k)?
You can have both an IRA and a 401(k). A 401(k) is generally offered through an employer, while a personal IRA is opened individually.
Having a 401(k) doesn’t automatically prevent you from contributing to an IRA. However, your income and workplace retirement coverage may affect whether your Traditional IRA contributions are deductible. Using both accounts may help you save more for retirement.
When Is the Deadline to Contribute to an IRA?
One useful feature of an IRA is that you may still be able to contribute for the previous tax year after December 31. For example, most taxpayers had until April 15, 2026, to make IRA contributions for the 2025 tax year.
For the 2026 tax year, the general contribution deadline is April 15, 2027. This means you may have additional time to contribute while preparing your income tax return. However, you should make sure your contribution is properly designated for the correct tax year.
Is Opening an IRA Worth It?
An IRA can be a useful way to prepare for retirement, especially if you want more control over your savings. You don’t necessarily need a large amount of money to begin. Some financial institutions allow you to start with a small deposit and contribute whenever your budget allows.
The important thing is to understand your options, choose an account that fits your needs, and make contributions you can afford. Remember that retirement accounts have contribution limits, withdrawal rules, and possible tax consequences.
Final Thoughts
An IRA can help you build retirement savings while providing important tax advantages. Whether you choose a Traditional IRA or Roth IRA depends on your income, retirement goals, and when you would prefer to receive the tax benefits.
At Local Tax, we understand that retirement accounts and income tax rules can sometimes be confusing. If you have questions about IRA contributions, deductions, or how retirement savings may affect your tax return, our team can help you better understand your tax situation.
Taking time to understand your retirement savings today can help you make more informed financial decisions for the future.
