What Is a Contributory IRA and How Does It Work?

A contributory IRA is an individual retirement account you fund yourself with deposits from your earned income, as opposed to a rollover IRA that receives money transferred out of a former employer’s plan.¹ Both come in Traditional and Roth versions, both grow inside the same federal tax rules, and your choice between them decides whether you get a tax break now or tax-free withdrawals later.

How a Contributory IRA Differs From a Rollover

The label “contributory” is about the source of the money. You are putting in cash from a paycheck or self-employment earnings, usually on a recurring schedule, up to an annual cap. A rollover IRA, by contrast, holds funds moved over from a 401(k) or similar workplace plan and isn’t subject to the same yearly contribution limit on the incoming transfer.

Both account types operate under the same body of IRA rules once the money is inside, but the distinction matters for contribution limits and tax reporting. Some savers keep the two separate to preserve the option of rolling the workplace money back into a future employer’s plan later.

Who Can Contribute

You need earned income to make a contributory deposit. The IRS counts wages, salaries, tips, and net self-employment earnings.² Passive income like dividends, interest, or rental profits does not count. Your total contribution for the year cannot exceed your earned income for that year, so someone who earned $4,000 can only contribute $4,000 even though the general cap is higher.

Anyone with earned income can contribute to a Traditional IRA regardless of age. Before 2020, contributions had to stop at 70½; that restriction is gone.³ Roth IRAs have never had an age cap, but they do have income limits covered below.

Married couples filing jointly get an extra option. A non-working spouse can contribute to their own IRA based on the working spouse’s earnings, as long as the couple’s combined contributions do not exceed the taxable compensation on their joint return.⁴ Each spouse can go up to the full annual limit in their own separate account.

2026 Contribution Limits and Deadline

The IRS caps how much you can put across all your IRAs combined, Traditional and Roth together. For 2026:⁵

Under age 50: $7,500
Age 50 or older: $8,600, which includes a $1,100 catch-up contribution

These are up from $7,000 and $8,000 in 2024 and 2025. The catch-up amount increased from $1,000 to $1,100 for the first time in years.

Contributions for a given tax year can be made up until the federal tax filing deadline the following April. For the 2025 tax year, the cutoff is April 15, 2026. Filing an extension for your tax return does not extend this contribution deadline.⁶ If you deposit money between January 1 and April 15, tell your institution which tax year to apply it to. Many default to the current year.

Traditional or Roth

The two versions of a contributory IRA differ in when you pay tax on the money. That single choice shapes almost everything else about how the account works for you.

Traditional IRA

Contributions may be tax-deductible in the year you make them, lowering your taxable income.⁴ Whether you get the full deduction depends on two things: whether you or your spouse is covered by a workplace retirement plan, and your income.

If neither of you has a workplace plan, you can deduct the full contribution at any income level. If you or your spouse is covered, the deduction phases out over these 2026 ranges:

Single filer with a workplace plan: $81,000 to $91,000
Married filing jointly, contributing spouse has a workplace plan: $129,000 to $149,000
Married filing jointly, contributing spouse has no workplace plan but the other spouse does: $242,000 to $252,000
Married filing separately with a workplace plan: $0 to $10,000

Even if your income puts you above these ranges and you get no deduction, you can still contribute to a Traditional IRA. The money grows tax-deferred; you just lose the upfront break and will owe ordinary income tax on withdrawals in retirement.⁵

Roth IRA

A Roth reverses the timing. You contribute money you have already paid tax on, and qualified withdrawals in retirement are tax-free.⁷ Direct Roth contributions are limited by your modified adjusted gross income. For 2026:⁵

Single filers: full contribution below $153,000, reduced from $153,000 to $168,000, none above $168,000
Married filing jointly: full contribution below $242,000, reduced from $242,000 to $252,000, none above $252,000

For a Roth withdrawal to be fully tax-free and penalty-free, the account must have been open at least five tax years and you must be 59½ or older.⁷ The five-year clock starts on January 1 of the year of your first Roth contribution, which is a good reason to open the account early even with a small deposit.

Roth IRAs also have no required withdrawals during the original owner’s lifetime, so the balance can keep compounding tax-free for as long as you leave it alone.⁷

Taking Money Out

Withdrawing from any IRA before age 59½ generally triggers a 10% additional tax on top of any income tax you owe.⁸ Several exceptions let you skip the 10%, including:⁹

First-time home purchase, up to $10,000 lifetime
Qualified higher education expenses for you, your spouse, or dependents
Unreimbursed medical expenses above 7.5% of adjusted gross income
Health insurance premiums while unemployed, if you received unemployment for at least 12 consecutive weeks
Total and permanent disability certified by a physician
Birth or adoption expenses, up to $5,000 per child
Substantially equal periodic payments taken over your life expectancy
Federally declared disaster, up to $22,000 if you sustained an economic loss

Skipping the 10% does not skip income tax. Traditional IRA withdrawals are still taxed as ordinary income. Roth accounts are more forgiving because your own contributions (as distinct from earnings) can come out tax-free and penalty-free at any time, since you already paid tax on that money.

At the other end, Traditional IRAs require minimum distributions starting April 1 of the year after you turn 73.¹⁰ Each year afterward you must withdraw at least a calculated amount based on your balance and life expectancy, and missing an RMD triggers an excise tax on the shortfall. The starting age is scheduled to move to 75 in 2033 for those born in 1960 or later. Roth IRAs have no lifetime RMDs.

Opening and Funding the Account

You can open a contributory IRA at most banks, brokerages, and online investment platforms. You will typically provide your Social Security number, a government-issued ID, employment information, and bank details for transfers. Many institutions use IRS Form 5305 or a similar standardized agreement to establish the account.¹¹

Setup will ask you to name beneficiaries. A primary beneficiary inherits first; a contingent beneficiary steps in if the primary cannot. Naming both keeps the account out of probate. Provide full names, dates of birth, and Social Security numbers for each person.

Once the account is funded, the money sits in a default cash position until you pick investments. At many brokerages, that default pays very little interest, so contributions left uninvested quietly lose ground over time. Pick an allocation soon after each deposit. If you are unsure where to start, a low-cost target-date fund matched to your expected retirement year handles diversification automatically and works as a reasonable default for most people.

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
Internal Revenue Service. Earned Income
3
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
4
Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
5
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
6
Internal Revenue Service. IRA Year-End Reminders
7
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
8
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
11
Internal Revenue Service. Form 5305 Traditional Individual Retirement Trust Account