What Is an Individual Retirement Account (IRA)?
An individual retirement account, or IRA, is a personal retirement account you open yourself at a brokerage, independent of any employer. Like a 401(k), it shelters your investments from taxes while they grow, but you control everything: the provider, the investments, and the contribution timing. Most brokerages let you hold stocks, bonds, ETFs, and mutual funds inside an IRA with no plan-menu restrictions.
There are two main flavors. A traditional IRA may give you a tax deduction on contributions today, with withdrawals taxed as ordinary income in retirement, while a Roth IRA is funded with after-tax dollars and qualified withdrawals come out entirely tax-free.
Contribution Limits and Deductibility
IRA contribution limits are much smaller than 401(k) limits, sitting around $7,000 per year with an additional catch-up amount for those 50 and older. You can contribute for a given tax year up until the tax filing deadline the following April, which gives you flexibility to fund it after seeing your bonus.
For young finance professionals, deductibility is the catch. If you are covered by a workplace retirement plan and your income exceeds the phase-out thresholds, which a banking salary usually does, your traditional IRA contribution is no longer deductible, making the Roth route or a backdoor Roth strategy more attractive.
IRA vs. 401(k)
The two accounts are complements, not substitutes. A 401(k) offers higher limits and an employer match but a limited fund menu, while an IRA offers full investment freedom and often lower fees but smaller contribution room.
A common priority order for a first-year analyst is to contribute enough to the 401(k) to capture the full match, then fund an IRA, then return to max out the 401(k) with whatever savings remain. Rolling an old 401(k) into an IRA after leaving a job is also a standard move to consolidate accounts and cut fund expenses.
A Concrete Example
Suppose a 24-year-old analyst contributes $7,000 to an IRA every year and invests it in a broad index fund returning 7% annually. By age 60, the account grows to roughly $1.05 million on about $252,000 of total contributions, with the rest coming from compounding.
In a traditional IRA that entire balance is taxed as it is withdrawn, while in a Roth IRA it can come out tax-free, which is why the traditional-versus-Roth decision hinges on whether your tax rate is higher now or in retirement.
