How does an IRA work?

April 19, 2024

Learn how IRAs work, including IRA tax advantages and other IRA benefits, and understand the difference between an IRA and 401(k), with our at-a-glance guide to individual retirement accounts.

One of the most popular—and useful—tools you can use for retirement savings is an individual retirement account (IRA).

Think of an IRA as a bucket that you can fill with stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investment vehicles.

The investments in your IRA bucket provide tax advantages that regular investments don’t offer. Even better, the money you invest in an IRA is compounded tax-free year over year, helping your nest egg grow over time.

Here are some common questions about how an IRA works and whether it could be a good option for you as you save for retirement.

Traditional IRA vs Roth IRA: Which should I choose?

It depends on your goals. The biggest difference between traditional IRAs and Roth IRAs is how they’re taxed. There are also differences related to withdrawals and required distributions. 

chart showing Roth IRA and Traditional IRA Comparison

  • Roth IRA: “Tax-free.” You invest after-tax dollars in a Roth IRA, but when you withdraw money after retirement, you’re not taxed on it. Roth IRAs can be useful if you’re a younger investor and are in a lower tax bracket than you expect to be as you progress in your career.
  • Traditional IRA: “Tax-deferred.” You can receive a tax deduction on the money you contribute to your traditional IRA each year.* Then, when you withdraw the money in retirement, it will be taxed as ordinary income. It’s worth noting that you won’t pay taxes on your untaxed earnings or contributions until you start taking required minimum distributions—currently, when you turn 73.

Learn more about different types of IRA accounts.

When can I open an IRA, and how much can I contribute to an IRA?

If you open an IRA before April 15, you can deduct your contribution on the filing year’s taxes. This can reduce your taxable income for that year.*

The amount of money that you contribute to an IRA before April 15 counts toward the prior year’s limit ($7,000 for tax year 2024). For example, if you open a new IRA in January, you could jumpstart your investment by contributing $7,000 before April 15 and then another $7,000 (or whatever the current limit) before April 15 of the following year. 

Should I choose an IRA, a 401(k) or both?

Many people have both an IRA and a 401(k), because they both will help toward their retirement goals. Here’s a look at the requirements and benefits of each. 

IRA

401(k)

Maximum annual contribution

$7,000/year ($8,000 if age 50+)
 

$23,000/year ($30,500 if age 50+)

Setup

You set it up yourself through your bank or an investment broker, like U.S. Bancorp Investments. An IRA is also a common option for those whose employers don’t offer a 401(k) (such as those who are self-employed, own their own business or are part of the gig economy).

A 401(k) is usually part of an employer’s benefits package, where they have an agreement with an investment broker to offer investments.

 

Investment options

You can choose any mix of investments to include in your IRA. You can make these decisions yourself or use a guided investment solution to fill your bucket.
 

An employer-sponsored 401(k) plan usually has limited investment options, and many times your portfolio is added to a general target-date fund (the year you’re aiming to retire).

Maximum annual contribution

IRA

$7,000/year ($8,000 if age 50+)
 

401(k)

$23,000/year ($30,500 if age 50+)

Setup

IRA

You set it up yourself through your bank or an investment broker, like U.S. Bancorp Investments. An IRA is also a common option for those whose employers don’t offer a 401(k) (such as those who are self-employed, own their own business or are part of the gig economy).

401(k)

A 401(k) is usually part of an employer’s benefits package, where they have an agreement with an investment broker to offer investments.

 

Investment options

IRA

You can choose any mix of investments to include in your IRA. You can make these decisions yourself or use a guided investment solution to fill your bucket.
 

401(k)

An employer-sponsored 401(k) plan usually has limited investment options, and many times your portfolio is added to a general target-date fund (the year you’re aiming to retire).


How do I manage an IRA?

Automated investing

Self-directed investing

Financial professional

Offered exclusively by U.S. Bancorp Investments
 

Offered exclusively by U.S. Bancorp Investments

Who manages it?

Robo-advisor
 

You
 

A financial professional

Effort

Low

High

Varies

How does it work?

The robo-advisor builds an online investment portfolio for you based on your goals and preferences. It monitors and adjusts your account as the market fluctuates.

Gives you complete freedom if you’re an experienced and hands-on investor. You can buy and sell specific investments online. 

You’ll work with a professional to create a financial plan that is aligned with you retirement goals. 


 

Works well if…

you are starting out and want a diversified mix of investments selected and managed for you.

you are confident in making your own investment decisions.
 

you have more sophisticated or complex financial needs or prefer personal guidance.

More information

Automated investing

Offered exclusively by U.S. Bancorp Investments
 

Self-directed investing

Offered exclusively by U.S. Bancorp Investments

Financial professional

Who manages it?

Automated investing

Robo-advisor
 

Self-directed investing

You
 

Financial professional

A financial professional

Effort

Automated investing

Low

Self-directed investing

High

Financial professional

Varies

How does it work?

Automated investing

The robo-advisor builds an online investment portfolio for you based on your goals and preferences. It monitors and adjusts your account as the market fluctuates.

Self-directed investing

Gives you complete freedom if you’re an experienced and hands-on investor. You can buy and sell specific investments online. 

Financial professional

You’ll work with a professional to create a financial plan that is aligned with you retirement goals. 


 

Works well if…

Automated investing

you are starting out and want a diversified mix of investments selected and managed for you.

Self-directed investing

you are confident in making your own investment decisions.
 

Financial professional

you have more sophisticated or complex financial needs or prefer personal guidance.

More information

Self-directed investing

Financial professional

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Disclosures

*Your deduction may be reduced or eliminated based on income.

Start of disclosure content

Investment and insurance products and services including annuities are:
Not a deposit • Not FDIC insured • May lose value • Not bank guaranteed • Not insured by any federal government agency.

U.S. Wealth Management – U.S. Bank is a marketing logo for U.S. Bank.

The information provided represents the opinion of U.S. Bank. This is not intended to be a forecast of future events or guarantee of future results.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

U.S. Bank does not offer insurance products but may refer you to an affiliated or third party insurance provider.