What Is an IRA?

An IRA is a retirement account you open on your own, rather than one you get through an employer. You can put money into it and invest that money in things like mutual funds, ETFs, stocks, or bonds.

And that’s an important difference. An IRA isn’t something you invest in. It’s the account where those investments are held. The investments are what can gain or lose value, which is why the balance in an IRA can change even when you haven’t added any more money.

Putting Money Into an IRA Is Only One Part

When money is contributed to an IRA, it goes into the account. That money can then be invested in things such as mutual funds, ETFs, stocks, or bonds, depending on what is available through the company holding the account.

If someone puts $200 into an IRA and invests it, the value of that money can change. It might grow beyond $200, or it could be worth less if the investments lose value.

That’s why an IRA balance can change even when no new money has been added.

Simply saying someone “has an IRA” doesn’t tell you exactly what they own. Two people can both have IRAs while holding completely different investments inside them.

Taxes Work Differently With an IRA

One reason people use IRAs for retirement is the way taxes work inside the account. If the investments earn money or increase in value, you generally don’t pay taxes on those gains each year while the money stays in the IRA.

Where the taxes show up depends on which kind of IRA you have.

With a traditional IRA, contributions may be tax-deductible depending on the person’s circumstances, and withdrawals are generally taxable. With a Roth IRA, contributions aren’t deductible, but qualified withdrawals can be tax-free.

That’s really the difference between traditional and Roth IRAs. The investments inside can be the same. What changes is when the money is taxed.

An IRA Isn’t the Same Thing as a 401(k)

IRAs and 401(k)s can both hold investments for retirement, but they aren’t the same kind of account.

A 401(k) is generally a retirement plan offered through an employer. An IRA is generally established by an individual rather than provided as part of a workplace retirement plan.

That’s why someone can have both a 401(k) and an IRA. Both can hold retirement investments, but they are separate accounts.

If You Want to Know More

There’s a lot more to IRAs than we could cover here, especially when it comes to contribution limits, withdrawals, rollovers, and the tax rules that can depend on your individual situation. The IRS has a much more detailed section on Individual Retirement Arrangements (IRAs) that covers those rules and links to additional IRA resources.