Tax-Deferred Retirement Accounts: Limits, RMDs, and Withdrawals

Tax-deferred retirement accounts let you postpone federal and state income tax on the money you contribute and on the investment growth inside the account, with taxes coming due only when you withdraw the funds, typically in retirement. The main options are the Traditional IRA, the workplace 401(k), the 403(b) for public school and nonprofit employees, and the 457(b) for state and local government workers. For 2026, you can contribute up to $7,500 to a Traditional IRA and up to $24,500 to a 401(k), 403(b), or governmental 457(b), with additional catch-up amounts starting at age 50.¹ You get a tax break now, your investments compound without an annual tax drag, and the IRS collects on the back end.

Which Account Fits Your Situation

The account available to you depends mostly on where you work.

Traditional IRA. Anyone with earned income can open one at a brokerage or bank. You pick the investments and contribute on your own schedule.²
401(k). The standard private-sector workplace plan. Contributions come out of your paycheck before taxes are calculated.³
403(b). The equivalent for employees of public schools and certain tax-exempt organizations.⁴
457(b). For state and local government employees, who generally can’t participate in a 401(k).⁵

If you’re self-employed or run a small business, you have three additional options. A SEP IRA allows an employer contribution of up to 25% of compensation or net self-employment earnings, capped at $72,000 for 2026; employees can’t make their own deferrals into a SEP.⁶ A SIMPLE IRA suits businesses with 100 or fewer employees and permits $17,000 in employee salary deferrals for 2026.⁷ A solo 401(k) combines an employee deferral with employer profit-sharing contributions, allowing total contributions up to $72,000 for those under 50.

How the Tax Deferral Actually Works

A pre-tax contribution never shows up as taxable income in the year you make it. Earn $60,000 and defer $5,000 into a 401(k), and you owe income tax on $55,000.⁸ With a workplace plan the deduction happens automatically through payroll. With a Traditional IRA, you claim it when you file.

Inside the account, dividends, interest, and capital gains compound with no annual tax bite. In a regular brokerage account, taxes eat into gains every year. Deferral keeps the full balance working. That advantage matters over decades.

The taxes don’t disappear. Every dollar you eventually withdraw counts as ordinary income in the year you take it, taxed at whatever federal and state rates apply then.

2026 Contribution Limits

The IRS adjusts these annually for inflation. For 2026:¹

Traditional IRA. $7,500, up from $7,000 in 2025. Age 50 and older adds a $1,100 catch-up, for $8,600 total.
401(k), 403(b), and governmental 457(b). $24,500. The standard catch-up for ages 50 through 59 (and 64 and older) is $8,000, bringing the total to $32,500.
SIMPLE IRA. $17,000 in employee deferrals, with a $4,000 catch-up at 50 and older.⁷
SEP IRA. The lesser of 25% of compensation or $72,000.⁶

Higher Catch-Up for Ages 60 Through 63

SECURE Act 2.0 created a bigger catch-up tier for participants who are 60, 61, 62, or 63. In 2026, those individuals can contribute an extra $11,250 to a 401(k), 403(b), or governmental 457(b) instead of the standard $8,000, pushing the total possible deferral to $35,750.¹ SIMPLE IRA participants in that age range get a higher catch-up of $5,250.⁷

The Overall Annual Additions Cap

Your personal deferral is only part of the picture. When employer matching or profit-sharing is added, the combined total for a defined contribution plan cannot exceed $72,000 in 2026, or $80,000 to $83,250 with catch-up contributions, depending on age. This cap matters most for high earners with generous employer contributions and for solo 401(k) users.

Going Over the Limit

An excess IRA contribution triggers a 6% excise tax on the excess for every year it stays in the account.⁹ Withdraw the excess plus any earnings on it before your filing deadline (including extensions) to fix it.¹⁰ For 401(k) plans, exceeding the elective deferral limit is worse: you must remove the excess by April 15 of the following year, or those dollars get taxed twice, once in the contribution year and again at distribution.¹¹ This trap catches people who switch jobs mid-year and contribute to two 401(k) plans without tracking the combined total.

When the Traditional IRA Deduction Phases Out

Anyone with earned income can contribute to a Traditional IRA, but the deduction itself isn’t always available.¹² If you or your spouse is covered by a workplace plan, the deduction phases out at these 2026 income levels:¹

Single filer covered by a workplace plan: full deduction below $81,000 modified adjusted gross income, partial between $81,000 and $91,000, none above $91,000.
Married filing jointly, contributor covered by a workplace plan: phase-out between $129,000 and $149,000.
Married filing jointly, contributor not covered but spouse is: phase-out between $242,000 and $252,000.
Married filing separately, covered by a workplace plan: phase-out between $0 and $10,000.

If neither you nor your spouse participates in any employer plan, the full Traditional IRA contribution is deductible regardless of income. People routinely miss this. Even when the deduction is off the table, you can still make a non-deductible Traditional IRA contribution, though a Roth IRA or backdoor Roth conversion is worth considering at that point.

Employer Matching and Vesting

Many employers match a portion of your 401(k) or 403(b) contributions. A common formula is 50 cents on the dollar up to 6% of pay. Employer matches are paid by the employer and don’t count against your personal deferral limit, though they do count toward the overall $72,000 annual additions cap.

Matched money often comes with a vesting schedule, meaning you don’t fully own it right away. Federal law allows two main approaches:¹³

Three-year cliff vesting: 0% ownership until you complete three years of service, then 100% all at once.
Six-year graded vesting: ownership climbs gradually, starting at 20% after two years and reaching 100% after six.

Leave before you’re fully vested and you forfeit the unvested portion. Your own contributions are always 100% yours. Safe harbor 401(k) plans, common at smaller employers, require immediate full vesting of matching contributions.¹³ Check your vesting status before accepting a new job. Walking away six months before a cliff-vesting date can cost thousands.

Early Withdrawals Before Age 59½

Take money out of a tax-deferred account before age 59½ and you’ll owe a 10% additional tax on top of regular income tax.¹⁴ On a $20,000 early withdrawal in the 22% bracket, that’s $4,400 in federal tax plus a $2,000 penalty, leaving you with $13,600. Expensive.

Exceptions to the 10% Penalty

The penalty has a long list of carve-outs, though not all apply to every account type. The most commonly used:¹⁵

Death or total and permanent disability of the account holder.
Separation from service at age 55 or later, from that employer’s plan only (not IRAs). Public safety employees qualify at 50.
Substantially equal periodic payments taken over your life expectancy, continued for at least five years or until 59½, whichever is later. Modifying the schedule early triggers the penalty retroactively on all prior distributions, plus interest.¹⁶
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
First-time home purchase from an IRA, up to $10,000 lifetime.
Higher education expenses from an IRA, for you, a spouse, or dependents.
Birth or adoption, up to $5,000 per child.
Federally declared disaster, up to $22,000 for those with a qualifying economic loss.
Domestic abuse, up to the lesser of $10,000 or 50% of the account, for distributions after December 31, 2023.

Even with an exception, regular income tax still applies. The exception only waives the 10%. For SIMPLE IRAs, distributions taken within the first two years of participation carry a 25% penalty instead of 10%.¹⁵

Required Minimum Distributions

The IRS won’t let you defer forever. At a certain age, you must begin taking required minimum distributions (RMDs) from tax-deferred accounts each year. Under current rules, RMDs start at 73.¹⁷ The threshold rises to 75 for individuals who turn 73 after December 31, 2032.¹⁸ If you’re still working and participating in your current employer’s 401(k) or 403(b), you can delay RMDs from that specific plan until you actually retire. Traditional IRAs don’t get this exception.

The amount is calculated by dividing your December 31 balance from the prior year by a life-expectancy factor from IRS tables. As you age, the factor shrinks and the required percentage grows.

Miss an RMD and the excise tax is 25% of what you should have taken. Correct the mistake within the correction window, which runs through the end of the second tax year after the penalty was imposed, and the rate drops to 10%.¹⁹ Better than the old 50%, but still worth calendaring every year.

Rollovers When You Change Jobs

When you leave an employer, the money in your workplace plan has four possible destinations: stay in the old plan (if allowed), move to your new employer’s plan, roll into a Traditional IRA, or cash out. Cashing out means full income tax plus the 10% penalty if you’re under 59½, so it’s usually the worst option.

How you move the money matters. A direct rollover, sometimes called a trustee-to-trustee transfer, sends the funds straight from one plan or IRA to another. You never touch the check, nothing is withheld, and no deadlines apply.²⁰

An indirect rollover, where the plan cuts a check to you, creates two problems. First, the plan must withhold 20% for federal taxes even if you intend to complete the rollover. Second, you have 60 days to deposit the full distribution amount, including replacing the 20% withholding from your own pocket, into another qualifying account. Deposit only the 80% you received and the missing 20% becomes a taxable distribution.²⁰

For IRA-to-IRA rollovers, there’s another limit: you’re allowed one indirect rollover across all your IRAs in any 12-month period. Direct trustee-to-trustee transfers don’t count against this limit, and neither do rollovers between employer plans or conversions to a Roth IRA.²⁰

What Happens to the Account When You Die

A surviving spouse who is the sole beneficiary can roll an inherited account into their own IRA and treat it as if it had always been theirs, with RMDs following the spouse’s own age. Most non-spouse beneficiaries of account holders who died in 2020 or later must empty the entire inherited account by the end of the tenth year following the year of death. Eligible designated beneficiaries, a narrow group that includes minor children of the deceased, disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the original owner, can still stretch distributions over their own life expectancy. Once a minor child reaches adulthood, the 10-year clock starts.²¹

Rules That Can Blow Up the Whole Account

Tax-deferred accounts come with strict rules about what you can do with the money while it’s inside. The IRS calls violations “prohibited transactions,” and the fallout is severe. Engage in one involving your IRA and the entire account is treated as distributed on the first day of that year, triggering a full tax bill and potentially the 10% early withdrawal penalty.²²

Common IRA violations include borrowing from the account, using it as loan collateral, buying property for personal use with IRA funds, and selling personal property to the account. These rules catch people who try to get creative with self-directed IRAs, such as buying a rental property they later use themselves. The account loses its tax-deferred status retroactively to January 1 of the violation year, and the damage can’t be undone. For 401(k) plans, participant loans are an explicit exception, as long as they follow the plan’s terms and are available to all participants on equal footing.²²

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
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
4
Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
5
Internal Revenue Service. 457(b) Plans for State or Local Governments – Key Characteristics
6
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
7
Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
8
Internal Revenue Service. Retirement Topics – Contributions
9
Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
10
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
11
Internal Revenue Service. Consequences to a Participant Who Makes Excess Deferrals to a 401(k) Plan
12
Internal Revenue Service. Topic No. 451, Individual Retirement Arrangements (IRAs)
13
Internal Revenue Service. Issue Snapshot – Vesting Schedules for Matching Contributions
14
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
15
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
16
Internal Revenue Service. Substantially Equal Periodic Payments
17
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
18
Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners
19
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
20
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
21
Internal Revenue Service. Retirement Topics – Beneficiary
22
Internal Revenue Service. Retirement Topics – Prohibited Transactions