Types of IRAs: Finding One for You | U.S. Bank (2024)

An individual retirement account (IRA) is a tax-advantaged investment account designed to help you save for retirement. There are several different types of IRA accounts, each suited for different types of investors. Review their features and benefits to see which might be appropriate for you.

Traditional IRA

The most popular form of IRA, a traditional IRA is a tried-and-true investment tool for many individuals who want to save for retirement with deductible pre-tax dollars.

• Who is eligible for a traditional IRA? Anyone with earned income.
• Annual traditional IRA contributions/limits: $6,500 for tax year 2023 (increasing to $7,000 for tax year 2024), with an additional $1,000 “catch-up” contribution if you’re age 50 or older.
• Traditional IRA tax details: After reaching age 59 ½, you can access funds without penalties or restrictions. Earnings are taxed as ordinary income at your tax rate at withdrawal. After you reach age 73, you must take required minimum distributions (RMD).
• IRA insight: Consider a traditional IRA if you don’t have access to an employer-sponsored retirement plan or are currently in a higher tax bracket than you anticipate being in after retirement.

Roth IRA

A Roth IRA is a retirement account in which you invest after-tax dollars. While contributions are not deductible, your money grows and can be withdrawn tax free.

• Who is eligible for a Roth IRA? Eligibility is based on income level.
• Roth IRA annual contributions/limits: $6,500 for tax year 2023 (increasing to $7,000 for tax year 2024), with an additional $1,000 catch-up contribution if you’re age 50 or older.
• Roth IRA tax details: You can withdraw contributions to a Roth IRA tax free at any time. However, you’ll incur taxes and penalties if you withdraw earnings before age 59 ½ and if you’ve held the account less than five years. Roth IRAs do not have required minimum distributions (RMDs).
• IRA insight: Consider a Roth IRA if you expect to be in a higher tax bracket during retirement. And remember that you can contribute to both a traditional and Roth IRA as long as you meet the requirements and your total contribution is $6,500 ($7,500 if you’re 50 or older) in tax year 2023.

Roth IRA for kids

A Roth IRA for kids allows minors to contribute after-tax dollars toward retirement with a parent or adult assigned as a custodian who manages the assets.

• Who is eligible? Any minor with earned income.
• Annual contributions/limits: The lesser of $6,500 in tax year 2023 ($7,000 in tax year 2024) or the total amount of money earned during the year.
• Tax details: Subject to all Roth IRA tax rules. When the minor reaches the legal age in your state, usually 18 or 21, account ownership converts to them. The minor is eligible to withdraw contributions without penalty, but taxes and penalties may apply if they tap into the earnings before age 59 ½.
• IRA insight: Consider a Roth IRA if you have or are a minor who wants to get a jump start on retirement savings to take advantage of tax-free growth on earnings.

Rollover IRA

A rollover IRA is an account created by transferring funds from a previous workplace savings plan into a traditional IRA.

• Who is eligible for a rollover IRA? Anyone who has a workplace retirement plan from a previous employer, including 401(k), 403(b) and 457 plans.
• Rollover IRA annual contributions/limits: You can roll over all or a portion of your retirement plan account, with some exceptions, such as RMDs or loans.
• Rollover IRA tax details: A rollover IRA is a traditional IRA and is subject to the same tax, withdrawal, and penalty rules.
• IRA insight: Consider a rollover IRA if you want to consolidate your retirement savings from previous employers into a single new account.

Self-directed IRA

Available as a traditional or Roth IRA, self-directed IRAs (sometimes called a self-managed IRA, self-directed brokerage or self-directed investing) allow individuals to select their own investments.

• Who is eligible for a self-directed IRA? Eligibility follows the same rules for traditional and Roth IRAs.
• Self-directed IRA annual contributions/limits: Subject to the same rules as traditional and Roth IRAs. However, investments are made through a third-party custodian or trustee.
• Self-directed tax details: Withdrawal rules are the same as those for traditional and Roth IRAs.
• IRA insight: Consider a self-directed IRA if you’re an experienced, DIY investor and want to diversify your retirement portfolio.

SEP IRA

A simplified employee pension (SEP) IRA is a traditional IRA an employer sets up for employees, including themselves.

• Who is eligible for a SEP IRA? Employers and self-employed individuals.
• SEP IRA annual contributions/limits: Contributions are made by the employer, vary annually based on business cash flow and are limited to the lesser of 25% of employee compensation or $69,000 for tax year 2024, with no catch-up contributions allowed. Employees can also make regular contributions to their SEP IRA.
• SEP IRA tax details: SEP IRA earnings grow tax free and are subject to the same rules as traditional IRAs.
• IRA insight: Consider a SEP IRA if you’re self-employed or you own a small business and want a simple way to fund your and your employees’ retirement.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a traditional IRA for small businesses with fewer than 100 employees.

• Who is eligible for a SIMPLE IRA? Employers and the self-employed.
• SIMPLE IRA annual contributions/limits: Employees can contribute up to $16,000 in 2024, with an additional $3,500 catch-up contribution for those age 50 or older. Employers are required to provide up to a 3% matching contribution or a 2% fixed contribution of each eligible employee’s compensation.
• SIMPLE IRA tax details: Like traditional IRAs, contributions are tax deductible and tax deferred. Withdrawal rules follow the same as traditional IRAs. However, withdrawals made within two years of contribution may be subject to additional penalties.
• IRA insight: Consider a SIMPLE IRA if you own a small company and would like to give employees an option to contribute to a retirement account.

Inherited IRA

An inherited IRA is an IRA funded from a deceased person’s retirement plan, including traditional, Roth, SIMPLE, and SEP IRAs, or 401(k) plans.

• Who is eligible for an inherited IRA? Anyone who is the beneficiary of an IRA or workplace retirement plan.
• Inherited IRA annual contributions/limits: No additional contributions are allowed.
• Inherited IRA tax details: Withdrawals from an inherited IRA can be made at any time and for any amount without penalty and are taxed based on the type of the original account. The beneficiary must withdraw all the assets per the inherited IRA distribution rules or the funds will be subject to penalties.
• IRA insight: Consider an inherited IRA if you inherit someone’s retirement plan and don’t want to incur a large tax bill by taking a lump-sum withdrawal. Note that there are different options for spouses, and your options will depend on the type of account you’ve inherited.

How many IRAs can you have?

While there’s no limit to the number of IRAs you can have, you are limited on the amount you can contribute each year. For example, if you have a traditional IRA and Roth IRA, or more than one traditional or Roth IRA, you can only contribute the maximum amount across all accounts ($6,500/$7,500 in tax year 2023 and $7,000/$8,000 in tax year 2024).

You can also contribute to a traditional or Roth IRA if you’re enrolled in a workplace retirement plans, including a 401(k), SEP or SIMPLE IRA.

Whether you prefer investing on your own or want personal investment guidance, we have an option to fit your needs. Learn how to open an IRA.