The Many Rules Surrounding IRAs

Individual retirement accounts are simple in purpose but not in operation. The tax code treats traditional IRAs and Roth IRAs differently, and the rules that govern contributions are not the same rules that determine deductions, withdrawals, rollovers or required distributions.

That distinction matters because an IRA decision can be technically allowed and still produce an unexpected tax result. Contributing to a traditional IRA does not automatically make the contribution deductible, qualifying for a Roth IRA contribution depends on income, and taking money out before retirement age can involve both income tax and an additional tax depending on the source of the money and the reason for the withdrawal.

How IRA rules fit together

The most useful way to understand IRA rules is to separate them into stages. The first stage asks whether you are allowed to contribute and how much; the second asks what tax treatment applies to that contribution; the third governs what happens while the money remains in the account; and the later stages cover withdrawals, required distributions, transfers and inheritance.

Many errors come from mixing those stages together. A high-income worker, for example, may still be allowed to contribute to a traditional IRA even when the contribution is not deductible, while the same income may reduce or eliminate the amount that can be contributed directly to a Roth IRA. Similarly, the fact that an IRA owns investments with tax-deferred or tax-free growth does not mean every withdrawal from the account will be tax-free.

This article focuses on the rules for regular traditional and Roth IRAs that individuals commonly open for themselves. SEP and SIMPLE IRAs are also IRAs, but their employer contribution rules and plan-specific limits are different, so they should not be folded casually into the annual contribution rules discussed here.

IRA contribution rules start with compensation and an annual limit

For 2026, the regular contribution limit across your traditional and Roth IRAs is $7,500. If you are age 50 or older by the end of the year, the catch-up amount raises the limit to $8,600, and in either case your contribution cannot exceed your eligible compensation for the year.^[1] If you put money into both types of account, the limit is shared rather than multiplied, so a $5,000 Roth IRA contribution would leave only $2,500 of the regular 2026 limit available for a traditional IRA contribution for someone under 50.

For IRA purposes, compensation generally comes from work, including wages, salaries, tips, professional fees and qualifying self-employment income. Investment earnings, interest, dividends, rental income, and pension income generally do not count as compensation, which is why someone who has fully stopped working may have substantial income yet still be unable to make a regular IRA contribution from that income alone.

The compensation rule has an important exception for married couples filing jointly. A spouse with little or no compensation may be able to fund an IRA based on the couple’s combined compensation, provided the joint contribution limits and other eligibility rules are satisfied. The IRA remains individually owned, so a so-called spousal IRA is not a joint retirement account.

There is no longer an age cutoff for making regular contributions to a traditional IRA, and Roth IRA contributions also have no age ceiling. The old rule that barred traditional IRA contributions after age 70½ was repealed for tax years after 2019, which means an older person who continues to have qualifying compensation can still contribute.

Timing also matters. A contribution for a tax year can generally be made during that year or by the tax-return filing deadline for that year, not including extensions, and a contribution made early in the following calendar year should be designated for the intended tax year. Missing that designation can create recordkeeping problems because the custodian may otherwise report the payment for the year in which it was received.

Overcontributing is not harmless. An excess amount that is not corrected under the applicable rules can trigger a 6% excise tax for each year the excess remains in the account, so contribution limits should be checked before adding a last-minute deposit, especially when deposits have been made to more than one IRA or income has changed during the year.

Income affects traditional IRA deductions and Roth eligibility in different ways

The income rules are often described as though they simply determine whether someone is “eligible for an IRA,” but that wording hides an important difference. For a traditional IRA, income often determines whether a contribution is deductible; for a Roth IRA, modified adjusted gross income can determine whether a direct contribution is allowed at all.

If neither you nor your spouse is covered by a retirement plan at work, a traditional IRA contribution is generally deductible up to the applicable contribution limit, subject to the usual compensation rules. When you or your spouse is covered by a workplace plan, the deduction can phase out as modified adjusted gross income rises, even though you may still be permitted to make the contribution itself.

For 2026, a single filer or head of household who is covered by a workplace retirement plan faces a traditional IRA deduction phaseout at modified adjusted gross income above $81,000 and below $91,000. For a married couple filing jointly when the contributing spouse is covered, the phaseout range is above $129,000 and below $149,000; when the contributor is not covered but the spouse is, the range is above $242,000 and below $252,000. Married filing separately has a much narrower range when the spouses lived together during the year.

A contribution that is permitted but not deductible becomes part of the owner’s basis in traditional IRAs and must be tracked correctly, generally on Form 8606. That recordkeeping is not optional bookkeeping trivia because future distributions can contain both taxable and nontaxable amounts, and failing to document basis can lead to money that has already been taxed being treated as taxable again.

Roth IRA rules work differently. For 2026, the ability to make a direct Roth IRA contribution begins to phase out at modified adjusted gross income of $153,000 for single filers and heads of household and disappears at $168,000; for married couples filing jointly, the phaseout runs from $242,000 to $252,000. The married-filing-separately rules are much more restrictive for spouses who lived together during the year.

Income therefore affects the two accounts through different gates, and that is why a reader comparing Roth IRAs with traditional accounts should separate contribution eligibility from tax deductibility. A person may have a valid nondeductible traditional IRA contribution even when a direct Roth contribution is unavailable, but that does not automatically make a Roth conversion tax-free.

Tax treatment depends on what went into the IRA and what later comes out

The tax advantage of a traditional IRA is usually deferral. Deductible contributions reduce taxable income when made, investments can compound inside the account without annual tax on interest, dividends or realized gains, and taxable amounts are generally included in ordinary income when distributed later. The practical value of that structure depends partly on the tax rate at the time of contribution, the tax rate when money is withdrawn, and whether the investor actually receives a deduction in the first place.

A Roth IRA reverses the timing. Regular Roth contributions are made with after-tax money, so there is no deduction for the contribution, but qualified distributions can come out free of federal income tax. That makes the account attractive when paying tax now is preferable to leaving future qualified withdrawals exposed to income tax, though the comparison is more nuanced than simply asking whether today’s tax rate is lower or higher.

Nondeductible traditional IRA contributions complicate the traditional account because they create basis. When a distribution or conversion occurs, the tax calculation generally looks across the owner’s traditional IRAs rather than allowing the taxpayer to select only the after-tax dollars in one account, which is why a strategy often called a backdoor Roth can produce taxable income when sizable pre-tax IRA balances already exist.

A conversion from a traditional IRA to a Roth IRA is not subject to the normal Roth income limit on direct contributions, but the taxable portion of the amount converted is generally included in income for the year of conversion. A conversion also cannot be undone by simply recharacterizing it back to a traditional IRA, so the amount converted and the resulting tax bill should be considered before the transaction is completed.

The distinction between tax deferral and tax-free qualified withdrawals also affects planning later in retirement. Traditional IRA distributions can add to taxable income and interact with other parts of a retiree’s tax picture, while qualified Roth distributions do not, which is one reason broader taxation planning often matters as much as the account label itself.

IRA withdrawal rules are not the same for traditional and Roth accounts

You are allowed to take money out of an IRA before retirement age, but “allowed” does not mean “free of tax or penalty.” The tax result depends on the type of IRA, whether the money represents contributions, conversions or earnings, your age, the age of the Roth IRA where relevant, and whether a statutory exception applies.^[2]

Traditional IRA withdrawals

With a traditional IRA, distributions of deductible contributions and earnings are generally taxable as ordinary income. A distribution taken before age 59½ can also be subject to the 10% additional tax on early distributions unless an exception applies, which means the cost of an early withdrawal can involve two separate layers of federal tax.

The exceptions are specific and should not be treated as a general hardship exemption. Federal law provides exceptions for circumstances such as certain unreimbursed medical expenses, qualifying higher-education costs, disability, certain first-home distributions, qualified birth or adoption distributions, and several newer categories, but an exception to the 10% additional tax does not necessarily make the underlying distribution exempt from ordinary income tax.

The first-home exception is a useful example of why details matter. It can remove the additional tax from up to $10,000 of qualifying lifetime distributions for first-home costs, but a deductible traditional IRA distribution is still generally included in taxable income, so the exception changes the penalty treatment rather than converting the withdrawal into tax-free money.

Readers who need to withdraw from any IRA before age 59½ should therefore identify the source of the distribution and the exact exception, if any, before moving the money. Taking the distribution first and trying to reconstruct the tax treatment later can be expensive when the exception has dollar limits, timing requirements or documentation conditions.

Roth IRA withdrawals

Roth IRA withdrawals use a different ordering system. Regular contributions are treated as coming out first, so an owner can generally withdraw an amount equal to prior regular Roth contributions without federal income tax or the 10% additional tax, but that flexibility should not be confused with a rule that every Roth withdrawal is automatically tax-free.

Earnings receive the most favorable treatment when the distribution is qualified. In general, a qualified Roth IRA distribution requires that the five-tax-year period beginning with the first year for which the owner made a Roth IRA contribution has been satisfied and that the distribution occurs after age 59½, after death, due to disability, or for a qualifying first-home distribution within the applicable limit.

Converted amounts introduce another layer because each conversion can have its own five-year period for purposes of the additional tax on certain early distributions. The rules are designed in part to prevent someone under 59½ from converting pre-tax IRA money to Roth and then immediately withdrawing the converted amount solely to avoid the early-distribution tax, so a Roth account with regular contributions, conversions and earnings may need careful basis records.

Required minimum distributions and inherited IRAs add a second timetable

Traditional IRA owners eventually have to begin required minimum distributions, or RMDs, even if they do not need the money for living expenses. For people who reach the applicable age under current law, the first distribution is generally tied to the year they reach RMD age, with the first payment allowed as late as April 1 of the following year and later annual RMDs generally due by December 31.

The applicable age is now determined by birth year rather than by the old age-70½ rule. People born from 1951 through 1959 generally use age 73, while those born in 1960 or later are scheduled to use age 75; older cohorts were governed by earlier transition rules. Delaying the first RMD until the following April can also cause two taxable RMDs to fall in the same calendar year, so the latest permitted date is not automatically the best tax choice.

Roth IRA owners do not have lifetime RMDs from their own Roth IRAs. That difference can make Roth assets useful for preserving tax-free compounding later in life, although beneficiaries who inherit Roth IRAs are subject to post-death distribution rules and cannot simply leave the account untouched indefinitely.

Inherited IRA rules depend heavily on the beneficiary’s relationship to the original owner, whether the beneficiary is an individual or another type of beneficiary, and whether the original owner had reached the applicable required beginning date. Many nonspouse designated beneficiaries are subject to a 10-year distribution period, and in some situations annual distributions are also required during that period rather than allowing the entire balance to remain until year ten.

Surviving spouses have more options than most other beneficiaries, including circumstances in which the inherited account can be treated as the spouse’s own IRA. Because the correct election can affect RMD timing, access to the money and future beneficiary treatment, an inherited IRA should not be handled as though it were simply another account transfer.

Transfers, rollovers and common IRA mistakes have rules of their own

Moving retirement money from one account to another can be tax-efficient, but the method matters. A direct trustee-to-trustee transfer from one IRA custodian to another is generally cleaner than taking possession of the money yourself because the funds move directly between institutions and the transaction is not subject to the IRA one-rollover-per-year limit.^[3]

If an IRA distribution is paid to you and you intend to roll it over, the normal deadline is 60 days. Separately, the one-rollover-per-year rule generally limits IRA-to-IRA 60-day rollovers across all of an individual’s IRAs during a 12-month period, while trustee-to-trustee transfers, Roth conversions, plan-to-IRA rollovers and several other direct movements are not counted under that particular limit.

The distinction is easy to miss because everyday conversation often uses “transfer” and “rollover” as interchangeable terms. For tax purposes they are not always interchangeable, and an attempted second 60-day IRA rollover within the restricted period can become a taxable distribution and may also create an excess contribution if the money is deposited into another IRA anyway.

Required minimum distributions cannot be rolled over, and excess contributions and their related earnings are also subject to special rules. That is another reason to identify exactly what type of distribution is moving before asking a custodian to send funds to a new account.

Prohibited transactions create a different category of risk. IRA owners generally cannot use IRA assets for personal benefit outside the retirement account, borrow from an IRA as though it were a participant loan, or engage in certain transactions with disqualified persons, and severe tax consequences can follow if an IRA loses its tax-favored status because of a prohibited transaction.

The practical lesson is that an IRA is not simply a brokerage account with a tax label attached. Contribution limits, deduction rules, withdrawal ordering, rollover procedures and distribution deadlines operate independently, so a sound decision usually starts by identifying which rule is actually controlling the transaction rather than applying a general assumption about how IRAs work.

For routine saving, most of these rules remain manageable once the account type, income limits and contribution records are clear. The cases that deserve more care are the ones in which several rules overlap, such as a nondeductible contribution followed by a conversion, an early withdrawal claimed under an exception, a rollover involving money paid directly to the owner, or an inherited IRA with a new distribution schedule.