Individual Retirement Account: Types, Contributions, and Withdrawals

An individual retirement account, or IRA, is a tax-advantaged trust or custodial account created under federal law to help you save for retirement. For 2026, you can put in up to $7,500 a year, or $8,600 if you’re 50 or older, and depending on which type of IRA you choose, either your contributions or your withdrawals can escape income tax.¹ The account operates under a written agreement that must meet specific requirements in the Internal Revenue Code: the money is held for your exclusive benefit, your balance is fully vested at all times, contributions come in as cash rather than property, and the account cannot hold life insurance.²

The Main Types of IRA

Federal tax law creates four IRA structures, and they differ in who sets them up and how the tax break works.

A traditional IRA gives you an upfront tax deduction on contributions (subject to income limits if you also have a workplace plan). The money grows tax-deferred, and you pay ordinary income tax on it when you withdraw in retirement.²

A Roth IRA flips the timing. Contributions are made with after-tax dollars, so there is no deduction, but qualified withdrawals, including all growth, come out completely tax-free.³

A SEP IRA (Simplified Employee Pension) is funded by an employer into traditional IRAs set up for employees. Self-employed people and small businesses use them because they allow much higher contributions than a standard IRA.

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a small-business plan in which the employer either matches employee contributions or makes a flat contribution for every eligible worker.

Most IRAs hold conventional investments like stocks, bonds, and mutual funds. A self-directed IRA uses the same legal framework but allows alternatives such as real estate, private equity, or precious metals through a specialized custodian. The prohibited transaction rules below apply just the same, and the IRS does not endorse the underlying investments.⁴

Who Can Contribute and How Much

To put money into an IRA, you (or your spouse if you file jointly) need earned income. Wages, salaries, tips, bonuses, and net self-employment income all count. Interest, dividends, and rental income do not.⁵

For the 2026 tax year, the annual contribution limit across all your traditional and Roth IRAs combined is $7,500. If you’re 50 or older, you can add a $1,100 catch-up contribution, for a total of $8,600. Your combined contributions can never exceed your taxable compensation for the year.¹

You have until the tax filing deadline (usually April 15 of the following year) to make contributions for the prior tax year.⁶ Contribute too much and the IRS charges a 6% excise tax on the excess every year it stays in the account. The simplest fix is to withdraw the excess and any earnings on it before the filing deadline.⁷

If you’re married filing jointly and one spouse has little or no earned income, that spouse can still fund their own IRA up to the full annual limit based on the working spouse’s compensation, as long as the couple’s combined contributions don’t exceed their combined taxable compensation.⁷

Income Limits for Deducting Contributions and Funding a Roth

Whether your traditional IRA contribution is deductible depends on your income and whether you or your spouse are covered by a workplace retirement plan. If neither of you has a workplace plan, you get the full deduction no matter your income. Once a workplace plan is in the picture, deductibility phases out.

For 2026, the traditional IRA deduction phase-out ranges are:¹

Single filer covered by a workplace plan: $81,000 to $91,000
Married filing jointly, contributor has a workplace plan: $129,000 to $149,000
Married filing jointly, spouse (not contributor) has a workplace plan: $242,000 to $252,000
Married filing separately, covered by a workplace plan: $0 to $10,000

Below the range you deduct the full contribution, inside the range you get a partial deduction, and above it you get none. Even without the deduction, you can still make a nondeductible traditional IRA contribution.

Roth IRAs use income limits differently: they determine whether you can contribute at all. For 2026, single filers with modified adjusted gross income below $153,000 can contribute the full amount, with the phase-out ending at $168,000. For married couples filing jointly, the range runs from $242,000 to $252,000.¹

When and How Money Comes Out

Traditional IRA withdrawals are taxed as ordinary income in the year you take them.⁸ Roth IRA qualified distributions are entirely tax-free as long as the account has been open at least five years and you’ve reached 59½.³

You cannot leave money in a traditional IRA indefinitely. Once you reach age 73, the IRS requires you to start taking required minimum distributions (RMDs). Your first RMD is due by April 1 of the year after you turn 73, and every RMD after that is due by December 31.⁹ The RMD age rises to 75 for people who turn 73 after December 31, 2032.¹⁰

Missing an RMD is expensive. The penalty is a 25% excise tax on the amount you should have withdrawn, dropping to 10% if you correct the shortfall within two years.¹¹ Roth IRAs are exempt from RMDs during the original owner’s lifetime.

Early Withdrawals Before 59½

Take money out of an IRA before age 59½ and you generally owe a 10% additional tax on top of any regular income tax. For SIMPLE IRAs, that jumps to 25% during your first two years in the plan.¹²

Federal law waives the 10% penalty for several situations:

First-time home purchase, up to $10,000 lifetime
Qualified education expenses for you, your spouse, children, or grandchildren
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
Health insurance premiums during a period of unemployment
Total and permanent disability of the account owner
Birth or adoption of a child, up to $5,000
A series of substantially equal periodic payments based on your life expectancy
Federally declared disaster losses, up to $22,000

An exception only removes the 10% penalty. Traditional IRA money you pull out still counts as taxable income.¹²

What You Can’t Do With an IRA

Federal law draws hard lines around IRA transactions. You cannot use the account to deal with yourself or certain related parties (called “disqualified persons”), a group that includes your spouse, your direct ancestors and descendants, and entities you control. Selling property to your IRA, borrowing from it, or pledging IRA assets as collateral for a personal loan all count as prohibited transactions.¹³

Get this wrong and the entire IRA can be disqualified, with the full balance treated as a distribution: income tax on all of it, plus the 10% penalty if you’re under 59½.

Certain assets are also off-limits. Life insurance contracts cannot be held in an IRA. Collectibles (artwork, antiques, rugs, gems, stamps, wine, and most coins) are treated as an immediate taxable distribution if bought with IRA money. Limited exceptions exist for specific U.S. gold, silver, and platinum coins and for bullion meeting minimum fineness standards, but only when a bank or approved trustee has physical possession of the metal.¹⁴

Beneficiaries and the 10-Year Rule

Your IRA’s beneficiary form, not your will, determines who inherits the account. That single piece of paper overrides whatever your estate plan says elsewhere, which is why people keep sending retirement savings to ex-spouses by accident. Review it after any marriage, divorce, birth, or death.

When an IRA owner dies, a surviving spouse has the most flexibility: they can roll the inherited IRA into their own account and treat it as always theirs. Most other beneficiaries have to empty the inherited IRA by the end of the 10th year after the account owner’s death. There are no required annual withdrawals during that window, but every dollar has to be out by the deadline.¹⁵

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

Surviving spouse
Minor child of the account holder, until they reach the age of majority (then the 10-year clock starts)
Disabled or chronically ill individuals
Beneficiaries no more than 10 years younger than the deceased

If nobody is properly designated and the estate inherits the IRA, the timeline is even shorter.

Moving Money Between IRAs

There are two ways to shift IRA money, and the difference matters. A direct transfer (trustee-to-trustee) moves funds from one custodian to another without touching your hands. You can do this as often as you want with no tax consequences.¹⁶

An indirect rollover is riskier. The custodian cuts you a check, and you have 60 days to redeposit the money into another IRA. Miss the deadline and the full amount becomes a taxable distribution, potentially with the 10% penalty. You’re also limited to one indirect IRA-to-IRA rollover per 12-month period across all of your IRAs.

The one-per-year limit doesn’t apply to Roth conversions, rollovers from an employer plan into an IRA, or direct trustee-to-trustee transfers. When in doubt, use a direct transfer.

Creditor Protection

IRAs get real protection in bankruptcy. Federal bankruptcy law exempts IRA assets from creditors up to an inflation-adjusted cap; as of 2025, that cap is $1,711,975 for traditional and Roth IRA contributions and earnings. Money rolled over from an employer plan like a 401(k) into an IRA doesn’t count against the cap and is fully protected.¹⁷

Outside bankruptcy, protection depends on state law and ranges widely. Creditor protection almost never applies to child support, alimony, or federal tax liens.

Opening an IRA

Setting up an IRA is straightforward, but you’re creating a formal trust relationship. You’ll pick a financial institution to act as custodian, provide your Social Security number and date of birth for identity verification, name primary and contingent beneficiaries, and sign the account agreement.¹⁸ Most institutions use their own version of the IRS model account agreement, pre-filled with their information as trustee.¹⁹

Setup fees run from nothing at most online brokerages to a few hundred dollars at institutions that offer specialized custody for alternative investments. Once the account is funded and the custodian countersigns, the IRA is legally established and you can start contributing.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
3
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
4
Internal Revenue Service. Application Procedures for Nonbank Trustees and Custodians
5
Internal Revenue Service. Topic no. 451, Individual Retirement Arrangements (IRAs)
6
Internal Revenue Service. IRA Year-End Reminders
7
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
8
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
9
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
10
Congress.gov. Required Minimum Distribution (RMD) Rules for Original Owners
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions
14
Internal Revenue Service. Investments in Collectibles in Individually Directed Qualified Plan Accounts
15
Internal Revenue Service. Retirement Topics – Beneficiary
16
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
17
Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
18
FINRA. FINRA Rule 4512 – Customer Account Information
19
Internal Revenue Service. Retirement Plan Forms and Publications