IRA Account Types: Traditional, Roth, SEP, SIMPLE, and Inherited

The main IRA account types are the Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Inherited IRA, and Self-Directed IRA. Each one has its own eligibility rules, contribution limits, and tax treatment, and the right choice depends on whether you’re an employee, self-employed, a small business owner, or someone who has inherited an account. For 2026, the base annual contribution limit for Traditional and Roth IRAs is $7,500, rising to $8,600 if you’re 50 or older.¹ Picking the wrong type or misunderstanding a withdrawal rule can cost thousands in avoidable taxes and penalties.

Traditional IRA

A Traditional IRA is the default choice for people who want an upfront tax break now and expect to pay tax later, usually in retirement when their bracket may be lower. You contribute pre-tax dollars in most cases, the money grows tax-deferred, and every dollar you eventually withdraw counts as ordinary income.²

You need earned income at least equal to your contribution. Wages, self-employment income, and alimony under pre-2019 divorce agreements all count. A useful wrinkle for married couples: if you file jointly, a non-working spouse can contribute to their own IRA based on the working spouse’s income, so each spouse can put in up to the full limit as long as combined earned income covers both.³

When the Deduction Phases Out

Whether your Traditional IRA contribution is fully deductible depends on two things: whether you or your spouse is covered by a workplace retirement plan, and your income. If neither of you has an employer plan, the full deduction is available at any income level. If either of you does, the deduction phases out inside these 2026 ranges:¹

Single filer covered by a workplace plan: $81,000 to $91,000
Married filing jointly, contributing spouse covered: $129,000 to $149,000
Married filing jointly, contributing spouse not covered but the other spouse is: $242,000 to $252,000
Married filing separately, covered by a plan: $0 to $10,000

Above the top of these ranges, you can still contribute; you just don’t get the deduction. That’s called a non-deductible contribution, and it matters for tax basis and for the backdoor Roth described below.

Required Minimum Distributions

The tax deferral has an expiration date. You must start taking Required Minimum Distributions (RMDs) from a Traditional IRA at age 73, and under SECURE 2.0 that age rises to 75 in 2033.⁴ Missing one is expensive. The IRS charges a 25% excise tax on the shortfall, dropping to 10% if you take the missed distribution within two years.

Roth IRA

The Roth IRA flips the Traditional’s tax treatment. You contribute money you’ve already paid tax on, so there’s no upfront deduction, but qualified withdrawals in retirement come out completely tax-free, including every dollar of growth.⁵ For anyone who expects their tax rate to hold steady or climb by retirement, this usually comes out ahead.

Two features make the Roth especially useful. You can withdraw your original contributions at any age without tax or penalty because you already paid tax on that money going in. And there are no required minimum distributions during the account owner’s lifetime, so the Roth doubles as a wealth-transfer tool.

Income Limits and the Five-Year Rule

The Roth has income-based eligibility restrictions the Traditional doesn’t. For 2026, your ability to contribute directly phases out here:¹

Single or head of household: $153,000 to $168,000
Married filing jointly: $242,000 to $252,000
Married filing separately: $0 to $10,000

To take earnings out tax-free, two conditions must be met: the account has to have been open at least five tax years, and you have to be 59½ or older, with exceptions for disability and death.

The Backdoor Roth for High Earners

If your income is above the Roth phase-out, there’s a widely used workaround. Contribute to a non-deductible Traditional IRA (no income limit applies to the contribution), then convert that account to a Roth. Because you already paid tax on the contribution, the conversion itself generally isn’t taxable, though any growth before conversion is.

Watch the pro-rata rule. If you hold any pre-tax money in Traditional, SEP, or SIMPLE IRAs, the IRS treats all your IRA assets as one pool when calculating the taxable portion of the conversion. If 90% of your combined IRA balance is pre-tax, roughly 90% of any conversion is taxable, no matter which dollars you think you converted. To use this strategy cleanly, you either start with no pre-tax IRA balances or roll existing pre-tax funds into an employer 401(k) first.

SEP IRA

The Simplified Employee Pension IRA is built for self-employed people and small business owners who want much higher contribution ceilings than a Traditional or Roth allows, without the paperwork of a 401(k). Only the employer funds a SEP; employees don’t make salary deferrals.⁶

For 2026, employer contributions can go up to the lesser of 25% of compensation or $72,000. All contributions are immediately 100% vested.⁷ There’s a fairness catch if you have staff: whatever percentage of compensation you contribute for yourself, you must contribute the same percentage for every eligible employee. You can’t put 25% away for yourself and 5% for your workers.

SIMPLE IRA

The Savings Incentive Match Plan for Employees is designed for businesses with 100 or fewer employees. Unlike the SEP, employees make their own salary deferrals, and the employer is required to contribute.⁸

For 2026, employees can defer up to $17,000 pre-tax. Workers 50 and older can add a $4,000 catch-up. A SECURE 2.0 provision creates a higher catch-up of $5,250 for employees aged 60 through 63. Each year, employers must either match employee contributions dollar-for-dollar up to 3% of compensation, or contribute a flat 2% for all eligible employees regardless of whether they defer anything. That mandatory employer piece is what distinguishes a SIMPLE from plans where employer contributions are optional.

One thing to know before taking money out: early withdrawals from a SIMPLE IRA in the first two years of participation carry a 25% penalty rather than the usual 10%.

Inherited IRA

When an IRA owner dies, the account passes to the named beneficiary as an Inherited IRA, and the withdrawal rules change sharply depending on who inherits.

Surviving Spouses

A surviving spouse has the most flexibility. They can roll the inherited account into their own IRA and treat it as if it had always been theirs, with no forced withdrawals until the spouse hits their own RMD age.⁹

Non-Spouse Beneficiaries

Most non-spouse beneficiaries face the 10-year rule: the entire balance must be withdrawn by the end of the tenth year after the original owner’s death, whether the account is Traditional or Roth. Missing that deadline triggers the same 25% excise tax that applies to missed RMDs.

A narrow group called eligible designated beneficiaries can stretch withdrawals over their own life expectancy instead:

Minor children of the account owner, 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 owner

Inheriting a Roth is more forgiving than inheriting a Traditional. If the original owner had the Roth open at least five years, distributions of earnings remain tax-free even under the 10-year rule. Every dollar out of an inherited Traditional IRA is taxable income.

Self-Directed IRA

A Self-Directed IRA is technically a Traditional or Roth IRA held by a specialized custodian that permits investments beyond stocks, bonds, and mutual funds. The appeal is access to real estate, private equity, promissory notes, and tax liens. Contribution limits and distribution rules are the same as any Traditional or Roth; the difference is what you’re allowed to hold inside.

Federal law bars IRAs from holding collectibles (artwork, antiques, gems, rare coins, alcoholic beverages) and life insurance contracts, though certain precious metals meeting minimum fineness standards are an exception.¹⁰

The bigger risk is the prohibited transaction rule. You cannot use IRA funds to buy property for personal use, borrow from the account, sell property to it, or pledge it as collateral. These restrictions extend to disqualified persons, which includes your spouse, parents, children, and their spouses.¹¹ The consequence catches people off guard: if you or a disqualified person engages in a prohibited transaction at any point in the year, the IRS treats the entire account as distributed to you on January 1 of that year. The full fair market value becomes taxable, and if you’re under 59½, the 10% early withdrawal penalty stacks on top. One bad transaction can wipe out decades of tax-advantaged growth.

Rules That Apply Across All IRA Types

A few rules run through every account type and are worth knowing before you commit to any of them.

Early Withdrawal Penalties and Exceptions

Withdrawing from any IRA before age 59½ generally triggers a 10% additional tax on top of the income tax you owe.¹² Congress has carved out exceptions where the 10% is waived, though income tax on a Traditional withdrawal still applies. The most commonly used:

Total and permanent disability of the account owner
First-time home purchase, up to $10,000 lifetime
Qualified higher education expenses for you, your spouse, children, or grandchildren
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income
Health insurance premiums while unemployed, after 12 consecutive weeks of unemployment benefits
Birth or adoption, up to $5,000 per child
Federally declared disaster losses, up to $22,000
Domestic abuse, up to $10,000 or 50% of the account, whichever is less
One emergency personal expense per year, up to $1,000

Rollovers Between Accounts

A direct trustee-to-trustee transfer moves money between IRA custodians without you ever touching it. No withholding, no deadline, no limit on how many you can do per year. This is the safe route.¹³

An indirect rollover sends the money to you first (with 10% withheld on IRA distributions, or 20% on employer plan distributions), and you have 60 days to deposit it into another qualifying account. Miss that window and the entire amount becomes a taxable distribution, plus the early withdrawal penalty if you’re under 59½. You also have to replace the withheld portion from other funds to deposit the full amount; otherwise, the withheld piece counts as a taxable withdrawal. On top of that, the IRS limits you to one indirect IRA-to-IRA rollover in any 12-month period, and treats all your IRAs (Traditional, Roth, SEP, and SIMPLE) as one pool for this count. Direct transfers avoid the limit entirely.

Form 8606 for Non-Deductible Contributions

You need to file Form 8606 if you make non-deductible contributions to a Traditional IRA, convert Traditional funds to a Roth, or take distributions from a Traditional IRA that contains any after-tax money.¹⁴ The form tracks your cost basis so the IRS knows which portion of eventual withdrawals has already been taxed. Skip it and you risk paying tax twice on the same dollars, because reconstructing years of non-deductible contribution history at retirement is difficult and often impossible without the paper trail.

Contribution Deadline

You have until April 15 of the following year to make IRA contributions for a given tax year.¹⁵ If you contribute more than the limit and don’t fix it, the IRS charges a 6% excise tax on the excess for every year it stays in the account. You can avoid the penalty by withdrawing the excess and any earnings on it before your tax return due date, including extensions.

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 USC 408 – Individual Retirement Accounts
3
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
4
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
5
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
6
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
7
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
8
Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
9
Internal Revenue Service. Retirement Topics – Beneficiary
10
Internal Revenue Service. Retirement Plan Investments FAQs
11
Internal Revenue Service. Retirement Topics – Prohibited Transactions
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
14
Internal Revenue Service. Instructions for Form 8606
15
Internal Revenue Service. IRA Year-End Reminders