An IRA, or individual retirement account, is a tax-advantaged investment account designed to help you reach your retirement goals. Whether you're just starting your career or getting close to retirement, an IRA can help you build a strong financial foundation for the future. In this post, we’ll cover:
How an IRA can help you reach your retirement goals
The different types of IRAs
How much you can save with an IRA
What is an IRA?
IRA stands for Individual Retirement Account. These accounts are tax-advantaged, which means they have tax benefits such as deferring taxes on contributions and earnings until distribution, tax-exempt earnings, and/or providing tax deductions.
Unlike a 401(k) plan, IRAs aren't linked to an employer. That means you can open an IRA independently whenever you want, even if you do or don't have a company-sponsored 401(k) plan.
There are two types of IRAs:
Traditional IRA: Generally, contributions are tax deductible, similar to a pre-tax deferral made to a 401(k) plan. Your contributions and earnings in the IRA will be tax-deferred, which means you pay taxes when funds are distributed.
Roth IRA: Contributions are not tax deductible, however, these contributions and earnings still grow tax-free. When distributed, the contributions (sometimes referred to as basis) are always tax free. The earnings can generally also be distributed tax-free if the conditions for a qualified distribution are met.¹
What is the difference between a traditional and Roth IRA?
The key difference between a traditional and a Roth IRA is when you receive a tax break. An easy way to remember this is:
Traditional = when contributed
Roth = when distributed
Generally, with a traditional IRA, you get the tax advantage when the contribution is made. This is because, as long as certain conditions are met, you can claim your contribution as a deduction to your taxable income for that year.
For example, if your taxable income is $60,000 for the year, and you contributed $5,000 to your traditional IRA, your taxable income is reduced to $55,000. When you request a distribution from your traditional IRA, it will be taxed as ordinary income in the year the funds are distributed. There is no distinction between what you contributed and what you earned by being invested; the entire withdrawal counts as income.
With a Roth IRA, you can enjoy the tax advantage when the funds are distributed. Since your contributions were not tax-deductible — and therefore were not claimed as a deduction to your income in the year the contributions were made — the contribution portion of the distribution is always tax-free.
The earnings will also be distributed tax-free if the distribution is a qualified distribution. Using the same example as above, if your taxable income is $60,000, and you contribute $5,000 to a Roth IRA, your taxable income for that year is still $60,000. Because of the after-tax status of Roth IRAs, the IRS has income limits that determine whether or not you may contribute.
Traditional | Roth
| |
Contributions | Deductible | Non-deductible |
Tax-break | When contributed | When distributed |
Distributions | Owe income taxes on the contributions and earnings when distributed | Tax-free. Contributions are always tax-free when distributed. Earnings are tax-free when distributed if a qualified distribution. |
What are the benefits of an IRA?
IRAs are a retirement savings option for anyone who earns taxable income in a given tax year. They can be a great way for individuals to reach their retirement savings goals, whether you're self-employed, want additional savings outside of your employer-sponsored 401(k) plan or don't have access to an employer-sponsored 401(k) plan.
Tax-advantaged
For starters, your contribution to an IRA may lower your taxable income (either at the time of contribution or distribution), which is how much of your income is subject to state and federal income taxes. Additionally, as your IRA balance fluctuates alongside the market, you will not be subject to capital gains taxes on the earnings like you would with a taxable investment account. This is why the IRS limits how much an individual may contribute each year.
More flexibility
In addition to the tax benefits, IRAs can offer more flexibility compared to a 401(k) plan. For example, the IRS allows early withdrawals up to $10,000 without penalty for first time home buyers, provided certain conditions are met. Also, distributions might be able to be taken from an IRA at any time, if your distribution meets the IRS exception criteria, instead of defined distribution triggers that must be met in a 401(k) plan in order to take a distribution.
More autonomy and options
With a 401(k) plan, you are a participant in your company's plan. They can change the plan features or the plan's investments at any time and they don't need your approval to make those changes. Plus, if you leave that job, you lose the ability to contribute to that 401(k) plan. With an IRA, the account is yours to manage as you see fit. Also, IRAs may offer more flexible investment options than 401(k) plans, allowing you control of what you invest your money in, such as stocks, bonds, and mutual funds.
Who should consider an IRA?
An IRA can help anyone reach their long-term retirement savings goals no matter where they are in their retirement journey. An IRA may be a fit for individuals who:
Want to start saving for retirement now
Have one or more 401(k) accounts or other retirement accounts from previous employers and are interested in consolidating their savings
Already have access to an employer-sponsored 401(k) plan and are interested in saving additional funds for retirement
As with any financial decision, consult an advisor or tax professional to help determine if an IRA could be a retirement savings option for you.
What is a rollover IRA?
Many savers open an IRA specifically to "roll over" funds from existing retirement accounts, such as a 401(k), 403(b), or 457(b) plan, from a previous employer. Sometimes people talk about "rollover IRAs" as if it is its own category, but in reality, it's just a traditional IRA or Roth IRA with the same tax advantages and contribution limits. Which type of IRA you choose to "roll over" your funds into is entirely up to you.²
Rollover IRAs make sense for savers looking to consolidate several retirement accounts rather than having a separate retirement account for each employer. On average, a 55 year old American will have had 12 different jobs in the course of their career. Consolidating disparate retirement accounts can help you keep track of your savings goals and potentially save you money by reducing or eliminating fees or commissions charged on each account.
How much can I contribute to an IRA?
You can make contributions to your IRA as long as you have taxable income in a given tax year. In 2026, individuals can contribute $7,500 to their traditional or Roth IRA.³ Individuals 50 and older can make an additional catch-up contribution of $1,100.
Two important things to note here:
When combined, contributions to all of your IRA accounts in a tax year cannot exceed the IRS annual limit, which is $7,500 in 2026 ($8,600 if you are aged 50 or over). (For example, you can't contribute $6,000 to a Roth IRA with Gusto Retirement and another $2,000 with another institution.)
Only new deposits count as a contribution. If you are consolidating accounts and simply rolling money over from a qualified retirement plan to an IRA, that does not count as a contribution.
Can I have a 401(k) and an IRA?
Yes. It's a common misconception that you can only have a 401(k) plan or an IRA, but you can have and contribute to both, with both retirement account types having their own contribution limits.
How much does an IRA cost?
Like a 401(k) plan, an IRA typically has account management fees, which can be a percentage of the value of your portfolio. When choosing an IRA, it could be a good idea to understand and compare account management fees across different account providers, as those fees can add up. You'll also need to consider the expense ratios, which are the cost of the investments themselves.
At Gusto Retirement, we designed an IRA that is:
Affordable: Accounts start at $2 per month plus an 0.08% annual account fee, which is equivalent to 67¢ for every $10,000 saved.⁴ If your account balance is $10,000 or more, the monthly fee is $4/month.
Flexible: Choose from one of Gusto Investment Services, LLC’s managed portfolios or build a custom portfolio using our selected low-cost funds.⁵
Finding your road to retirement
It's never too early or too late to save for your future. Learn more about setting up an IRA with us. And if you found this content helpful, here are a few more resources you might be interested in:
Curious how much you can save for retirement this year? Check out: contribution limits for 2026.
Compound returns can have a big impact on your retirement savings — here's how.
Are you self-employed? Setting up a SEP IRA is a low-stress, flexible way to help you and your employees plan for retirement.
FAQs
What is an IRA and how does it work?
An IRA (Individual Retirement Account) is a tax-advantaged investment account you open independently, not through an employer. Depending on the type (traditional or Roth), you either get a tax break when you contribute or when you withdraw in retirement, and your investments grow without being subject to capital gains taxes along the way.
What is the difference between a traditional IRA and a Roth IRA?
The main difference is the timing of the tax benefit. With a traditional IRA, contributions may be tax-deductible now, but you pay income taxes when you withdraw the money in retirement. With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals — including earnings — typically are tax-free.¹
How much can you contribute to an IRA in 2026?
In 2026, you can contribute up to $7,500 per year to an IRA. If you're 50 or older, you can add a catch-up contribution of $1,100, bringing your total to $8,600.³ This limit applies across all your IRA accounts combined; you can't exceed it by splitting contributions across multiple providers.
Can I have both a 401(k) and an IRA at the same time?
Yes. You can contribute to both a 401(k) and an IRA in the same year. They have separate contribution limits, so maxing out one doesn't affect how much you can put into the other. Having both can be a good strategy for maximizing your overall retirement savings.
What is a rollover IRA?
A rollover IRA is simply a traditional or Roth IRA that you use to consolidate retirement savings from a previous employer's 401(k), 403(b), or 457(b) plan. Rolling over into a single IRA can help you keep track of your savings, reduce account fees, and give you more control over your investment options.
This content is for informational purposes only and is not intended to be construed as tax or investment advice. You should consult a tax professional or financial advisor to consider all alternative options to rolling your money into a 401(k). Investing involves risk, and investments may lose value, including loss of principal.
Disclosures
¹ Roth contributions are always distributed tax-free. The earnings on Roth contributions will generally be tax-free if the following conditions are met: (a) you're either over age 59 ½, disabled, or have died AND (b) it has been 5 years since your first Roth contribution under the current plan. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.
² This content is for informational purposes only and is not intended to be construed as tax or investment advice. You should consult a tax professional or financial advisor to consider all alternative options to rolling your money into a 401(k). Investing involves risk, and investments may lose value, including loss of principal.
³ Subject to IRS cost-of-living adjustments. In 2026, individuals can contribute up to $7,500 between their traditional and Roth accounts. If you're 50 or older, you can contribute an additional $1,100 ($8,600 in total).
⁴ This information is for illustrative purposes only, and is not intended to be construed as investment or tax advice. Investment advisory services for SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an SEC-registered investment adviser. Information shown here assumes a static balance of $10,000 per month, an assumed annual account fee of 0.08% on assets under management (calculated and deducted on a monthly basis at 1/12 of the annual stated rate (0.08%) based on the month-end account balance) and does not account for common factors that affect the value of your account balance over time such as gains, losses, distributions, additional contributions, etc. It's not intended to be taken as investment advice or as an assurance or guarantee of future performance. The fee presented does not include other fees that an IRA owner may incur from other third parties or affiliates including, but not limited to, from mutual fund expense ratios and monthly maintenance fees. See the Form ADV 2A Brochure for more information regarding this fee.
⁵ This information is for illustrative purposes only, and is not intended to be construed as investment or tax advice or as an assurance or guarantee of future performance. Investing involves risk, and investments may lose value, including loss of principal. Investment advisory services for SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. Expense ratios for custom portfolios will vary. For more information regarding these fees, see the ADV 2A Brochure and Form CRS. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup.
