An IRA, or Individual Retirement Arrangement, is a tax-advantaged retirement account governed by Sections 408 and 408A of the Internal Revenue Code. People often call it a “qualified IRA,” but the IRS technically groups IRAs under “tax-favored” retirement savings rather than under “qualified plans,” a legal category reserved for employer-sponsored plans like 401(k)s and pensions that must comply with the Employee Retirement Income Security Act. The practical point for you is the same either way: an IRA only keeps its tax advantages if it follows the IRS rules on who can contribute, how much can go in, when money must come out, and what the account can and cannot hold.
Employer plans often come with matching contributions, higher ceilings, and loan features. IRAs trade those for flexibility. You pick the custodian, choose the investments, and contribute on your own schedule. SEP and SIMPLE IRAs sit closer to the employer-plan line because a business funds or matches them, but the money still lands in individual accounts owned by each employee.
The Four IRA Types the IRS Recognizes
Which type of IRA you have determines nearly every other rule, so start there.
A Traditional IRA lets you deduct some or all of your contributions from taxable income in the year you make them, depending on your income and whether you have a workplace retirement plan. Investments grow tax-deferred, and you pay ordinary income tax on withdrawals in retirement.1Internal Revenue Service. Traditional and Roth IRAs
A Roth IRA works in reverse. Contributions are made with after-tax dollars, so there is no deduction up front, but qualified withdrawals in retirement come out completely tax-free, including growth. Roth IRAs also have no required minimum distributions during the original owner’s lifetime.2Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
A SEP IRA is designed for self-employed individuals and small business owners. The employer contributes up to 25% of each employee’s compensation, with a 2026 cap of $69,000. Employees don’t make their own contributions.3Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
A SIMPLE IRA serves small businesses with 100 or fewer employees. Both the employer and the employee contribute. For 2026, the standard employee limit is $17,000, with catch-up contributions of $4,000 for those 50 and older and $5,250 for those aged 60 through 63.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Who Qualifies to Contribute
The basic requirement for opening and funding any IRA is earned income. The IRS defines this as taxable compensation you receive for work: wages, salaries, professional fees, tips, and self-employment income all count. Passive income like dividends, rental payments, and interest from a savings account does not.5Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs)
There is no maximum age. Before the SECURE Act, Traditional IRA contributions stopped at age 70½. That restriction is gone. As long as you or your spouse (if filing jointly) have earned income, you can keep contributing.6Internal Revenue Service. Retirement Topics – IRA Contribution Limits
Spousal Contributions
If one spouse doesn’t work outside the home, the working spouse can still fund an IRA in the nonworking spouse’s name. The couple must file jointly, and the working spouse must earn at least enough to cover both contributions combined. The nonworking spouse gets their own account with the same annual limits.
Roth IRA Income Limits
Roth IRAs add an income test. Your Modified Adjusted Gross Income determines whether you can contribute the full amount, a reduced amount, or nothing at all. For 2026:4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
- Single or head of household: full contribution below $153,000 MAGI, reduced between $153,000 and $168,000, none at or above $168,000.
- Married filing jointly: full contribution below $242,000, reduced between $242,000 and $252,000, none at or above $252,000.
- Married filing separately (lived with spouse): reduced contribution below $10,000, none at $10,000 or more.
Contribution Limits and Deadlines
For 2026, the combined annual limit across all your Traditional and Roth IRAs is $7,500. If you’re 50 or older, you can add a $1,100 catch-up, bringing the total to $8,600. Your total contribution can never exceed your taxable compensation for the year, so if you earned $5,000, that’s your ceiling regardless of the published limit.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
You have until the tax filing deadline, typically April 15 of the following year, to make contributions for the prior tax year. That means 2026 contributions can go in anytime from January 1, 2026 through April 15, 2027.7Internal Revenue Service. IRA Year-End Reminders
Contributing more than the limit triggers a 6% excise tax on the excess for every year it stays in the account. The penalty recurs annually until you withdraw the overage or apply it to a future year’s contribution.8Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
When Money Has to Come Out
Traditional, SEP, and SIMPLE IRA owners must begin taking required minimum distributions once they reach age 73. The first RMD is due by April 1 of the year after you turn 73; each subsequent distribution is due by December 31. Waiting until April to take the first one means two RMDs in the same calendar year, which can push you into a higher tax bracket.2Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
Under the SECURE 2.0 Act, the RMD age is scheduled to increase from 73 to 75 starting in 2033. If you were born in 1960 or later, you won’t need to begin distributions until you turn 75.
Roth IRAs are the exception. The original owner never has to take RMDs, so the balance can keep growing tax-free for as long as you live.2Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
When You Can Take Money Out Early
Pulling money from a Traditional IRA before age 59½ generally means paying ordinary income tax on the withdrawal plus a 10% additional tax. That penalty exists to discourage raiding retirement funds early.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
The IRS carves out several exceptions where the 10% penalty doesn’t apply. Some of the most commonly used:
- First-time home purchase, up to $10,000 for buying, building, or rebuilding a first home.
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
- Total and permanent disability.
- Substantially equal periodic payments, a series of roughly equal annual withdrawals calculated using IRS-approved methods, taken over your life expectancy.
- Distributions after a physician certifies a terminal illness.
The SECURE 2.0 Act added newer exceptions for distributions after December 31, 2023, including up to $1,000 per year for emergency personal expenses and up to $10,000 (or 50% of the account, whichever is less) for victims of domestic abuse.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Penalty-free doesn’t mean tax-free. With a Traditional IRA, you still owe income tax on the withdrawn amount even when an exception eliminates the 10% surcharge. Roth IRA withdrawals of your original contributions are always tax-free and penalty-free because you already paid tax on that money going in.
What Can Disqualify the Account
The IRS draws hard lines around what you can do with IRA funds, and crossing them can destroy the account’s tax-advantaged status entirely. A prohibited transaction is any improper use of the account by you, your beneficiaries, or certain family members (spouse, parents, children, and their spouses). Common examples include borrowing from your IRA, selling personal property to it, using it as collateral for a loan, and buying real estate you plan to use personally.10Internal Revenue Service. Retirement Topics – Prohibited Transactions
The consequence is severe. If you or a family member engages in a prohibited transaction at any point during the year, the IRA is treated as if it distributed its entire balance to you on January 1 of that year. You would owe income tax on the full fair market value, and if you’re under 59½, the 10% early withdrawal penalty applies on top. This is where people with self-directed IRAs holding real estate or private equity sometimes get blindsided.10Internal Revenue Service. Retirement Topics – Prohibited Transactions
Certain asset types are also off-limits. Life insurance contracts cannot be held in any IRA.11Internal Revenue Service. Retirement Plan Investments FAQs Collectibles, including artwork, antiques, rugs, most coins, gems, stamps, and alcoholic beverages, are generally treated as taxable distributions the moment your IRA purchases them. A narrow exception exists for certain U.S. Mint gold and silver coins and for bullion meeting minimum fineness standards, but only if a qualifying trustee holds physical possession.12Internal Revenue Service. Investments in Collectibles in Individually Directed Qualified Plan Accounts
An IRA earns its tax treatment by staying inside these lines. Contribute only what you’re allowed, take distributions on the schedule the code lays out, keep the assets on the approved list, and the account does what it was built to do.