What is an IRA and How Does it Work? — Individual Retirement Accounts (IRAs)
A way to help you save more for retirement and get tax advantages while you're working.
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An IRA, or Individual Retirement Account, is a tax-advantaged retirement savings account that offers tax benefits, including income tax-free or tax-deferred growth - which can help your retirement savings grow faster than it would in a traditional savings or investment account.
IRAs are similar to employer-sponsored 401(k)s, but you open, fund and manage it on your own. An IRA can be used to supplement your employer retirement savings plan, or – if you are self-employed – IRAs can be your main retirement savings vehicle.
Who is an IRA for?
An IRA can be a good retirement investment for anyone who qualifies — your eligibility depends on having earned income and may be affected by your filing status. Think you’ll be in a lower income bracket when you retire? A traditional IRA can help you save now with tax-deductible contributions. If you expect to have higher income in retirement, consider a Roth IRA for income tax-free growth potential.
How does an IRA work?
When you contribute to an IRA, you can choose to invest your money in the market or put it in an interest-paying account. As that money grows, it isn't taxed, so your savings could grow faster. The specific details and tax benefits of your IRA depend on if you choose a Traditional or Roth IRA.
What are the benefits of an IRA?
Depending on your financial situation and the type of IRA you choose, contributions you make now can lower your taxable income, helping you save at tax time. And funds in your IRA grow and compound faster because they aren't taxed. In addition to tax advantages, IRAs offer investment flexibility, and can supplement an employer-sponsored retirement plan or serve as your primary retirement plan.
The three types of IRAs
Which you choose depends on a few key factors, including your current financial situation and your anticipated tax bracket after retirement. A financial professional can help you decide which is best for you:
Why consider an IRA?
Tax benefits could help you accumulate more money for retirement: IRAs are tax-advantaged retirement savings accounts. Traditional IRAs grow federal income tax-deferred, while Roth IRAs grow income tax-free. The result? Your money could grow faster, and — in some cases — you'll have more money for retirement than you would if you relied on non-IRA savings or investment accounts.
You decide how to contribute: : With an IRA, you contribute what you want, when you want, within the specified contribution limits. If you have “spare” funds, you can contribute more. If you have other financial commitments, you can contribute less, or nothing at all. It’s up to you.
In 2025, the most you can contribute to all your Traditional IRAs and Roth IRAs is $7,000 if you are under 50 years old by the end of the year. After age 50, you can make an IRA contribution of up to $8,000 per year.1
You decide how to invest: Most accounts let you choose from a range of investments – from interest-bearing savings accounts to CDs, mutual funds, and bonds. You'll have more choices than most 401(k)s and other employer-sponsored plans offer.
Income Tax-free withdrawal in retirement: Depending on the terms of your specific IRA, your interest or investment gains could compound income tax-free. Plus, you may be able to withdraw your contributions income tax-free in retirement.
How to fund your IRA
Most financial institutions offer several ways for you to fund your retirement account. Among the most popular methods is to make your IRA contribution via transfers from a linked bank account, although some people prefer to deposit a check.
Transfers from an existing bank account are preferable because they will be completed within a few business days, while checks may take longer to clear. Making an IRA contribution via bank transfer is a simple process and can usually be completed quickly and easily from a laptop or phone.
How to open an IRA
Ready to boost your long-term savings with a tax-advantaged Individual Retirement Account? You’re in good company: A recent Guardian study found nearly 8 in 10 working Americans (77%) have one, and those with a retirement account often have higher self-reported financial, mental, and physical health.2 Still, only 30% of workers have a solid understanding of the different types of IRAs and how they work.3
If you’re not sure how to proceed, a Guardian Financial Professional can help you to better understand the benefits of IRAs, make the appropriate choice for your needs, and — if you decide to move forward — help you to open your account quickly and easily. To find someone near you, fill in your zip code and click below.
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This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
1 2025 IRA Contribution Limits, Internal Revenue Service, November 13, 2024.