Required minimum distributions
IRAs can come with required minimum distributions, or RMDs. This means you must withdraw money after a certain age or the amount not withdrawn is subject to a tax penalty. Roth IRAs do not come with RMDs for the original account owner.
IRAs: Types of Accounts
Let’s look at the rules for traditional and Roth IRAs, as well as several other types of IRAs.
Traditional IRAs
You can contribute to a traditional IRA regardless of your income, and contributions may be tax-deductible. However, the amount you can deduct can decrease and eventually phase out at higher incomes. This amount can also change depending on whether you or your spouse are covered by a retirement plan at work.
You can withdraw money from a traditional IRA after age 59 1/2 without incurring a tax penalty. Traditional IRA distributions are part of your taxable income.
Contribution limits: For 2025, your contributions cannot exceed $7,000 (or $8,000 if you're 50 or older) across your traditional and Roth IRAs. If your taxable compensation is less than this amount, your contribution limit is your taxable compensation for the year.
RMDs: You must begin taking distributions from your traditional IRA on the April 1st following the calendar year you turn 73.
Roth IRAs
Roth IRAs are funded with post-tax income. The money then grows tax-free, and earnings can be withdrawn tax-free after age 59 1/2 if it’s been at least 5 years since your first contribution. You can always withdraw your original contribution tax- and penalty-free.
Contribution limits: Across your traditional and Roth IRAs, your contributions can’t be more than $7,000 (or $8,000 if you're 50 or older) for 2025. If your taxable compensation is less than this amount, your contribution limit is your taxable compensation for the year.
Roth IRAs have income eligibility limits. Depending on how much you make, you may be able to contribute a reduced amount, or you may not be able to contribute at all.
RMDs: For Roth IRAs, the original account owner does not have to make RMDs. However, if you inherit a Roth IRA, RMD rules can apply.
Rollover IRAs
Rollover IRAs let you move (or “roll over”) assets from your old employer-sponsored retirement account into an IRA. With a rollover IRA, there’s no limit on the amount of money you can transfer. However, if you continue contributing to your IRA, future contribution limits apply.
You can roll your employer-sponsored retirement account into a traditional or Roth IRA. Just keep in mind that if you roll over money from a tax-deferred account like a 401(k) into a Roth IRA, you will likely be responsible for paying taxes on that money.
SEP IRAs
Simplified employee pension (SEP) IRAs allow employers to contribute to traditional IRAs on behalf of their employees. Businesses of any size can set up SEP Plans.
Withdrawals from traditional SEP IRAs are part of your taxable income. Like traditional IRAs, you can withdraw from your traditional SEP IRA without a tax penalty after the age of 59 1/2.
Contribution limits: Employers can contribute up to 25 percent of each employee's pay or $70,000 for 2025 (whichever amount is lower).
RMDs: You must begin taking distributions from your traditional SEP IRA on the April 1st following the calendar year you turn 73.
SIMPLE IRAs
A SIMPLE IRA (Savings Incentive Match Plan for Employees) allows both employees and employers to contribute to an employee’s IRA. SIMPLE IRAs are generally available to small businesses, typically with fewer than 100 employees.
You can withdraw money from your SIMPLE IRA without incurring a tax penalty after age 59 1/2 and after you’ve had the account for 2 years.
Contribution limits: For 2025, employees can contribute up to $16,500 to their SIMPLE IRAs. Employer contributions are mandatory. Employers can either make matching contributions of up to 3% of the employee’s compensation or non-elective contributions of 2% of the employee’s salary.
RMDs: You must begin taking distributions from your SIMPLE IRA on the April 1st following the calendar year you turn 73.
Inherited IRAs
An inherited IRA is a type of retirement account you open when you’re the beneficiary of someone else’s IRA after they pass away. You can inherit a traditional, Roth, SIMPLE IRA or SEP IRA, and how the account is handled depends on your relationship to the original account owner and the type of plan they held.
Inherited IRAs allow beneficiaries to continue growing the funds tax-deferred or tax-free, depending on the original account type, but it comes with specific withdrawal rules. Most non-spouse beneficiaries must follow the 10-year rule, which requires that the entire balance be withdrawn by the end of the 10th year after the original owner’s death.
Contribution Limits: You cannot make new contributions to an inherited IRA, even if you’re still working or under the age of 50. The account is for managing inherited funds only—not for adding new retirement savings.
RMDs: RMD rules for inherited IRAs vary.
- If you're a spouse beneficiary, you may treat the IRA as your own or follow inherited IRA rules.
- Non-spouse beneficiaries must usually follow the 10-year withdrawal rule.
- Some eligible designated beneficiaries, like minor children or chronically ill individuals, may be able to receive RMDs over their lifetime.
Benefits and drawbacks of an IRA
Before deciding whether to open an IRA, it’s important to understand both the potential advantages and the drawbacks that come with this type of retirement savings account.
Benefits of an IRA
- Tax advantages: IRAs offer either tax-deferred growth with a traditional IRA or tax-free growth with a Roth IRA
- Investment flexibility: IRAs provide access to a broad range of investment options such as stocks, bonds, mutual funds and CDs
- Accessibility for the self-employed: For those who are self-employed or whose employers don’t offer retirement plans, opening an IRA can be a valuable way to start saving
- Supplemental savings: Even if you already participate in an employer-sponsored plan, an IRA can help you increase your overall retirement savings
- Estate planning support: An inherited IRA may allow your beneficiaries to extend the growth potential of your savings under specific distribution rules
Drawbacks of an IRA
- Required minimum distributions (RMDs): Traditional, SIMPLE IRAs and SEP IRAs require minimum distributions beginning at a certain age, which may affect your long-term strategy
- Early withdrawal penalties: Taking money out before age 59½ can result in tax penalties unless you qualify for an exception
- Investment risk: The value of your IRA depends on the performance of your chosen investments, which means gains and losses are both possible
With these benefits and considerations in mind, it’s important to evaluate your risk tolerance, tax situation and financial goals to determine if an IRA is the right fit.
IRAs: What account should you choose?
Choosing a type of IRA will depend on your financial situation. Your income, age and whether you or your spouse have access to an employer-sponsored retirement plan may affect whether you opt for a SIMPLE, SEP or rollover IRA. All these factors may also affect how much you can contribute to a plan or deduct from your taxes.
When deciding between a traditional and Roth IRA, it’s important to consider your eligibility, contribution limits and how much money you’ll be able to deduct on your taxes, if any. Taxes work differently for Roth and traditional IRAs. It’s important to understand how taxes work for both types of accounts and consider your anticipated income in retirement.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
