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WalletPrep worksheet · Investing

What is an IRA and how does it work?

Name ____________________ Date __________

Key ideas

  1. You open an IRA yourself. It lives at a brokerage you choose, not at your job. It stays with you for life, through every job change.
  2. The account does not invest itself. Money you move in can sit as cash. Leo's $90,000 of deposits could grow to about $304,993 invested, at an assumed 7%.
  3. The yearly limit is lower than a 401(k). You can put in up to $7,500 in 2026, across all your IRAs, or your pay from work if that is less.

Vocabulary

IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Employer match
Money your employer adds to your retirement plan when you contribute, up to a set percentage of your pay.
Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
Beneficiary
The person or group you name to receive an account, a trust or an insurance payout when you die.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Work it out

Leo, 27, works for a small company with no 401(k). He opens a Roth IRA and sets up $250 a month. He compares investing it with leaving it as cash.

  1. Monthly transfer
  2. Put in a year
  3. Put in over 30 years
  4. Growth at an assumed 7%
  5. Invested after 30 years
  6. Left as cash earning 0%

Check yourself

  1. Which of these is true about an IRA?

    • A. Your employer has to set it up
    • B. You open it yourself at a brokerage
    • C. It invests your money automatically
    • D. Only people without a 401(k) can have one

  2. You put $200 a month into an IRA. How much is that in a year?

    • A. $1,200
    • B. $2,000
    • C. $2,400
    • D. $3,000

  3. You moved $1,000 into a new IRA last month and did nothing else. What is most likely true?

    • A. It is sitting as cash, not invested yet
    • B. It is already in an index fund
    • C. It was added to your 401(k)

Your turn

Decide whether you need an IRA: if your job has no 401(k), or you already get your full match, open one at a low-cost online brokerage. Set a monthly transfer, even $50, and choose one broad fund for it to buy.

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Answer key

What is an IRA and how does it work?

Work it out

  1. Monthly transfer$250
  2. Put in a year$3,000
  3. Put in over 30 years$90,000
  4. Growth at an assumed 7%$214,993
  5. Invested after 30 years= $304,993
  6. Left as cash earning 0%$90,000
  1. Leo puts in $250 × 12 = $3,000 a year, well under the $7,500 yearly limit.
  2. Over 30 years his deposits add up to $3,000 × 30 = $90,000.
  3. In a broad index fund at an assumed 7% a year, growth adds about $214,993, for $304,993. Returns vary and can be negative.
  4. If he never picks a fund and the cash earns nothing, he has just the $90,000 he put in.

Check yourself

  1. B. You open it yourself at a brokerage An IRA is your own account. You can have one along with a 401(k), and you choose the investments inside it.
  2. C. $2,400 $200 × 12 = $2,400 a year.
  3. A. It is sitting as cash, not invested yet Many IRAs hold new money as cash until you choose a fund. Moving money in and investing it are two separate steps.