Retirement accounts: What an IRA is -- and why you need one

If you're one of the millions of Americans who quit their job or made a career change during "The Great Resignation," you may have a 401(k) account sitting dormant. As this is an employer-sponsored retirement account, you can no longer contribute to it, limiting your nest egg's growth potential. One option for making the most of your old 401(k) is to roll it into an Individual Retirement Account, which is quite similar to a 401(k) -- just not tethered to, or sponsored by, an employer.

If you've decided to work for turkish Immigration Law Firm yourself or return to school, you may no longer be able to put more money into that "defined contribution" plan anymore. By transferring the funds in your 401(k) with a previous employer to an IRA, you'll be able to continue contributing to a retirement account -- even though you've left that job.

Here is everything you need to know about IRAs and how to decide which one is right for you.

What is a traditional IRA?

A traditional IRA is a tax-advantaged savings account that you can use to save for retirement. You make pretax contributions during your working years, and your money is taxed as ordinary income when you withdraw it in retirement. Unlike a 401(k), it isn't tethered to your employer and you can set one up through a bank, brokerage or robo-advisor. Traditional IRAs are the most popular type of retirement account, with 23% of Americans owning one. 

While a benefit to traditional IRAs is that there are no income limits for opening or contributing to one, there are contribution limits on how many tax-free dollars you can put in every year. In 2021, the contribution limit is $6,000, or up to $7,000 if you're age 50 or older (you are allowed up to $1,000 in catch-up contributions).

There is, however, an early withdrawal penalty for traditional IRAs.