How IRA Payments Work: Contributions, Withdrawals, and Penalties

IRA payments work in two directions, and each side has its own tax rules. Money going in is capped at $7,500 a year for 2026 ($8,600 if you’re 50 or older), and whether it’s deductible depends on your income and whether you have a workplace retirement plan. Money coming out is taxed as ordinary income if it’s a traditional IRA, tax-free if it’s a qualified Roth distribution, and hit with an extra 10% penalty if you take it before age 59½ without a qualifying exception.

What You Can Put In Each Year

For the 2026 tax year, the contribution limit is $7,500 across all of your traditional and Roth IRAs combined.¹ That’s a single ceiling, not a per-account one. Having two IRAs doesn’t double the amount you can save.

If you’re 50 or older by the end of the year, you can add a $1,100 catch-up contribution for a total of $8,600.² The catch-up is now indexed to inflation under the SECURE 2.0 Act.

You need earned income to contribute. Wages, salary, and self-employment income count; investment returns and pension payments don’t. Your contribution can’t exceed your taxable compensation for the year, so if you earned $4,000, that’s your cap even though the general limit is higher.¹

Married couples filing jointly get a useful carve-out. A nonworking spouse can contribute based on the working spouse’s income, and each spouse can contribute up to the full limit, as long as the combined contribution stays within the couple’s total taxable compensation.¹

You have until the tax filing deadline to make a contribution for the prior year. For 2026, that’s April 15, 2027.³ Overshoot the limit and the IRS charges a 6% excise tax on the excess for every year it stays in the account.⁴ Pull the excess (plus any earnings on it) before the filing deadline and you avoid the penalty.

Whether Your Contribution Is Deductible

Traditional IRA contributions are generally deductible, but the deduction phases out if you or your spouse is covered by a workplace retirement plan. For 2026, single filers with a workplace plan get the full deduction at $81,000 or less of modified adjusted gross income, a partial deduction between $81,000 and $91,000, and no deduction above $91,000. Married couples filing jointly phase out between $129,000 and $149,000.⁵

If neither spouse has a workplace plan, the full deduction is available at any income level. Even when the deduction is fully phased out, you can still make a nondeductible traditional IRA contribution, though the growth will eventually be taxed on the way out.

Roth contributions are never deductible, but qualified withdrawals are tax-free. The income limits work as eligibility gates. Single filers for 2026 begin phasing out at $153,000 of modified adjusted gross income and are shut out entirely at $168,000. Married couples filing jointly phase out between $242,000 and $252,000.⁵

How Withdrawals Are Taxed

Traditional IRA distributions are taxed as ordinary income in the year you receive them. Since your contributions were either deducted or made pre-tax, the IRS collects when the money leaves the account. If you made any nondeductible contributions along the way, the portion attributable to those contributions comes out tax-free, but you have to track that basis by filing Form 8606.

Roth IRAs work in reverse. You can pull your original contributions out at any time, tax-free and penalty-free, because you already paid tax on that money. Earnings are the sensitive part: to withdraw them without tax or penalty, you have to be at least 59½ and the account has to have been open for at least five years.⁶ Because contributions can come out freely, a Roth doubles as unusually accessible savings.

The 10% Early Withdrawal Penalty

Take money out of a traditional IRA before age 59½ and you owe a 10% additional tax on top of the regular income tax. The penalty is reported on Form 5329.⁷

Several situations let you skip the 10% penalty, though you’ll still owe regular income tax on traditional IRA amounts:

First-time home purchase, up to $10,000 lifetime, for buying, building, or rebuilding a first home.⁸
Qualified higher education expenses for you, your spouse, or your children.
Unreimbursed medical expenses above 7.5% of your adjusted gross income.
One emergency personal expense distribution per calendar year, capped at the lesser of $1,000 or your vested balance above $1,000.
Domestic abuse survivor distributions, up to the lesser of $10,000 or 50% of the account balance.
Health insurance premiums while unemployed, if you’ve received unemployment compensation for at least 12 consecutive weeks.
Total and permanent disability.⁷

There’s also a structured route around the penalty called substantially equal periodic payments, sometimes referred to as a 72(t) schedule. You commit to a series of withdrawals calculated under one of three IRS-approved methods and must continue them without modification until the later of five years or age 59½.⁹ Break the schedule early and the 10% penalty applies retroactively to every payment you’ve already taken. It isn’t a casual option.

When You Must Start Taking Money Out

Traditional IRAs can’t grow tax-deferred forever. At a set age, required minimum distributions kick in.

Your RMD starting age depends on your birth year. If you turn 73 before January 1, 2033, your applicable age is 73. If you turn 74 after December 31, 2032, your applicable age is 75.¹⁰ In practice, people born before 1960 start at 73, and people born in 1960 or later start at 75. Your first RMD is due by April 1 of the year after you reach that age. Every RMD after that is due by December 31.

Roth IRAs are exempt from RMDs during the original owner’s lifetime.¹¹

To calculate your RMD, divide your December 31 balance from the prior year by the life expectancy factor for your age in the IRS Uniform Lifetime Table. A separate table applies if your sole beneficiary is a spouse more than 10 years younger.⁶

Missing an RMD is expensive. The excise tax is 25% of the amount you should have taken, dropping to 10% if you catch and correct the shortfall within two years.¹¹ Both figures are improvements over the pre-SECURE 2.0 penalty of 50%.

Moving Money Between IRAs

How you move IRA funds matters for taxes. A direct transfer (trustee-to-trustee) moves money from one custodian to another without your ever holding it. There’s no cap on how often you can do this, and no tax consequence.¹²

An indirect rollover is riskier. The custodian sends you a check and you have 60 days to redeposit the full amount into another IRA. Miss the window and the whole distribution becomes taxable, with the 10% penalty on top if you’re under 59½. You’re also limited to one indirect IRA-to-IRA rollover per 12-month period across all of your IRAs. The IRS treats every traditional, Roth, SEP, and SIMPLE IRA you own as one pool for this rule.¹² Break it and the second rollover is taxed as a distribution; if the money lands in another IRA anyway, it becomes an excess contribution and picks up the 6% annual excise tax until removed.

Inherited IRAs

When someone inherits an IRA, the payout rules shift depending on the relationship.

A surviving spouse can roll the inherited IRA into their own account and treat it as if it had always been theirs, following the standard rules. Non-spouse beneficiaries can’t.

Under the SECURE Act’s 10-year rule, most non-spouse beneficiaries must empty the inherited IRA by December 31 of the tenth year after the owner’s death. If the owner died before their RMD age, the beneficiary can distribute on any schedule within that window. If the owner died after RMD age, the beneficiary must take annual distributions in years one through nine based on their own life expectancy and empty the account in year ten.

A limited group of “eligible designated beneficiaries” can still stretch distributions over their own life expectancy:

Surviving spouse.
Minor children of the account owner, though the 10-year clock starts once they reach the age of majority.
Disabled or chronically ill individuals.
Beneficiaries no more than 10 years younger than the original owner.

Inherited IRA distributions are never subject to the 10% early withdrawal penalty, regardless of the beneficiary’s age.⁷ But missed annual distributions inside the 10-year window still trigger the 25% RMD excise tax.

Transactions That Can Blow Up the Account

A few dealings between you and your IRA are flatly prohibited: borrowing from it, selling property to it, pledging it as loan collateral, or buying property for personal use with its funds.¹³ The rules also cover transactions with “disqualified persons,” including your spouse, parents, children, and their spouses.

The consequence is total. If you engage in a prohibited transaction at any point during the year, the IRS treats the entire IRA as if it distributed all of its assets to you on January 1 of that year. The full fair market value becomes taxable income, and the 10% penalty applies on top if you’re under 59½.¹³ No partial disqualification, no warning, no correction window.

Withholding and the Forms You’ll Deal With

When you take a distribution, your custodian asks about federal income tax withholding. Regular, recurring distributions use Form W-4P. One-time or irregular withdrawals, including eligible rollover distributions, use Form W-4R.¹⁴ You can elect zero withholding, but the tax is still due at filing, and underpaying through the year can bring estimated tax penalties.

If you make nondeductible contributions to a traditional IRA or convert traditional funds to a Roth, file Form 8606 with your return. It tracks your basis, meaning the money you’ve already been taxed on, so you don’t get taxed on it again at distribution. Custodians report contributions on Form 5498 and distributions on Form 1099-R, but they don’t track your basis for you. That recordkeeping is yours.

1
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
2
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
3
Internal Revenue Service. IRA Year-End Reminders
4
Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
5
Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
6
Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs
9
Internal Revenue Service. Substantially Equal Periodic Payments
10
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
11
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
12
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
13
Internal Revenue Service. Retirement Topics – Prohibited Transactions
14
Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments