Section 408 of the Internal Revenue Code is the federal statute that creates and governs Individual Retirement Arrangements, better known as IRAs. It defines the four IRA types (Traditional, Roth, SEP, and SIMPLE), sets how much you can contribute, restricts what your account can invest in, controls how and when you can take money out, and imposes penalties when the rules are broken. For 2026, the basic annual IRA contribution limit is $7,500, with an additional $1,100 catch-up for savers aged 50 and older.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Everything else that follows in this article flows from Section 408 or from provisions it works in tandem with.
The Four IRA Types Section 408 Creates
A Traditional IRA accepts contributions that may be tax-deductible in the year you make them, grows tax-deferred, and produces taxable ordinary income when you take distributions.
A Roth IRA reverses that timing. You contribute after-tax dollars, get no deduction, and take qualified distributions (including all growth) entirely free of federal income tax.2Internal Revenue Service. Traditional and Roth IRAs
A SEP IRA (Simplified Employee Pension) is a Traditional IRA funded entirely by an employer; employees cannot make their own salary deferrals into it.3Internal Revenue Service. Simplified Employee Pension Plan (SEP) The 2026 contribution limit is the lesser of 25% of the employee’s compensation or $72,000.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is available to businesses with 100 or fewer employees and does allow employee salary deferrals.4Internal Revenue Service. SIMPLE IRA Plan The 2026 employee deferral limit is $17,000, with a catch-up of $4,000 for those 50 and older, or $5,250 for those aged 60 through 63 under a SECURE 2.0 provision.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Employers must contribute annually, either matching deferrals dollar-for-dollar up to 3% of compensation or making a flat 2% contribution for every eligible employee.
2026 Contribution Limits
The $7,500 basic limit (and $8,600 with the catch-up) applies across all of your Traditional and Roth IRAs combined, not to each account separately. The 2026 catch-up is the first increase to the IRA catch-up figure since it was created, the result of a SECURE 2.0 cost-of-living adjustment.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
You have until the tax filing deadline to make contributions for a given year, meaning 2026 contributions can be made as late as April 15, 2027.5Internal Revenue Service. IRA Year-End Reminders One additional cap: your contributions cannot exceed your taxable compensation for the year. If you earned $4,000, $4,000 is the most you can contribute.
Who Can Deduct and Who Can Contribute
Traditional IRA Deductibility
Whether you can deduct a Traditional IRA contribution depends on your income and whether you or your spouse participate in a workplace retirement plan. If neither of you is covered, your full contribution is deductible at any income level.6Internal Revenue Service. IRA Deduction Limits
When you are covered by a workplace plan, the deduction phases out once your modified adjusted gross income exceeds annually adjusted thresholds, and disappears entirely above the phase-out range. A separate, higher phase-out applies if only your spouse is covered.7Internal Revenue Service. Retirement Topics – IRA Contribution Limits Check the current IRS cost-of-living announcement for the year’s numbers.
Above the deduction ceiling you can still make a non-deductible Traditional IRA contribution. The money grows tax-deferred, and only the earnings are taxed when withdrawn. Report the non-deductible amount on Form 8606 to preserve your cost basis so you are not taxed twice.8Internal Revenue Service. Instructions for Form 8606 (2025)
Roth IRA Income Limits
Roth contributions are never deductible, so the question is whether you can contribute at all. For 2026, single filers can make a full Roth contribution with MAGI under $153,000, with a partial contribution allowed up to $168,000. Married couples filing jointly can contribute fully with MAGI under $242,000, with partial contributions up to $252,000. Above these ceilings, direct Roth contributions are not permitted.
Early Withdrawals and the 10% Penalty
Taking money out of a Traditional, SEP, or SIMPLE IRA before age 59½ triggers a 10% additional tax on the taxable portion of the distribution, on top of regular income tax.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Section 72 carves out several exceptions. You can withdraw up to $10,000 penalty-free for a first-time home purchase. Other exceptions cover unreimbursed medical expenses exceeding 7.5% of adjusted gross income, qualified higher education expenses, and substantially equal periodic payments taken over your life expectancy.10Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs Distributions after total and permanent disability are also penalty-free.
SIMPLE IRAs carry an extra trap. If you withdraw money during your first two years of participating in the plan, the penalty jumps from 10% to 25%.11Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules That two-year clock runs from the date your employer first deposits contributions into your account, not from your hire date.
The Roth IRA Five-Year Rule
You can withdraw your original Roth contributions at any age, tax- and penalty-free, because you already paid tax on that money. Earnings work differently. A distribution of earnings is “qualified” (fully tax-free) only if you are at least 59½ (or meet another qualifying event such as disability or a first-time home purchase up to $10,000) and at least five tax years have passed since your first Roth contribution.12Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements
The five-year clock begins on January 1 of the tax year for which you make your first contribution to any Roth IRA. A first contribution for the 2026 tax year starts the clock January 1, 2026, and satisfies the rule on January 1, 2031. Earnings withdrawn earlier may be subject to income tax and the 10% penalty, though the same exceptions listed above can eliminate the penalty portion.
Required Minimum Distributions
Traditional IRA money cannot stay sheltered indefinitely. Required minimum distributions must begin once you reach age 73.13Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) Under SECURE 2.0, that age is scheduled to rise to 75 for people who turn 74 after December 31, 2032. The same rules apply to SEP and SIMPLE IRAs.
Your first RMD is due by April 1 of the year after you reach the applicable age. Every RMD after that must be taken by December 31. Delaying the first distribution to the following April means two RMDs in a single tax year, which can lift you into a higher bracket.14Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Each year’s RMD is the account’s fair market value as of December 31 of the prior year divided by a life expectancy factor from the IRS Uniform Lifetime Table. If you own multiple Traditional IRAs, you calculate the RMD separately for each account but can take the total from any one or any combination of them.15Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
Missing an RMD is expensive. The excise tax is 25% of the amount you should have taken.13Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) That drops to 10% if you correct the shortfall within the correction window, which generally runs two years from the RMD deadline.
The original owner of a Roth IRA is never required to take RMDs during their lifetime, which lets the account keep compounding tax-free. After the owner dies, most non-spouse beneficiaries must empty an inherited Roth by the end of the tenth year following the year of death.16Internal Revenue Service. Retirement Topics – Beneficiary Certain eligible designated beneficiaries, including a surviving spouse, a minor child of the account owner, or a chronically ill individual, may use different schedules.
Rollovers Between IRAs
You can move IRA money between accounts without triggering tax, but the mechanics matter. A direct transfer, where one custodian sends the funds straight to another, is the safest method. There is no withholding, no reporting hassle, and no limit on how many you can do per year.17Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
An indirect rollover is riskier. You receive the distribution yourself and have 60 days to deposit it into another IRA. Miss the window and the entire amount becomes a taxable distribution, potentially with the 10% penalty if you are under 59½.18Internal Revenue Service. Topic No. 413, Rollovers from Retirement Plans The IRS limits indirect rollovers to one per 12-month period across all of your IRAs combined (Traditional, Roth, SEP, and SIMPLE are aggregated). Roth conversions and trustee-to-trustee transfers do not count toward this limit.17Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
What Your IRA Cannot Do
Prohibited Investments
Section 408 bans two categories of investments outright: life insurance contracts and collectibles.19Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts No part of an IRA trust may be invested in life insurance, and this applies to every IRA type.
The collectibles rule is broader than most people expect. If your IRA buys a collectible, the cost is treated as a taxable distribution to you in the year of purchase. The statute defines collectibles to include artwork, rugs, antiques, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.
A narrow exception exists for precious metals. Your IRA can hold U.S.-minted gold, silver, and platinum coins, certain state-issued coins, and gold, silver, platinum, or palladium bullion meeting the fineness standards required for delivery on a regulated futures contract. The bullion must remain in the physical possession of an IRA trustee, not at home or in a personal safe deposit box.
Prohibited Transactions
Section 408 works with Section 4975 to bar any transaction that uses IRA assets for the personal benefit of the account owner or a “disqualified person.” That category includes you, your spouse, your parents, your children and their spouses, and any entity you or these family members control with 50% or more ownership.
Common prohibited transactions include borrowing from your IRA, selling property to the IRA, using IRA funds to buy property for personal use, and pledging the account as loan collateral. The consequence is severe: the entire IRA is treated as though the full balance was distributed on January 1 of the year the transaction occurred. You owe income tax on the full fair market value, plus the 10% early distribution penalty if you are under 59½.20Internal Revenue Service. Retirement Topics – Prohibited Transactions The IRA loses its tax-advantaged status from that point forward. This trap catches people most often with self-directed IRAs, where the owner has direct control over investment choices.
Fixing an Excess Contribution
Contributing more than the annual limit triggers a 6% excise tax on the excess for every year it stays in the account.21Office of the Law Revision Counsel. 26 U.S. Code 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts The tax recurs each year until you fix the problem.
To avoid the 6% entirely, withdraw the excess plus any earnings it generated by your tax return due date, including extensions.5Internal Revenue Service. IRA Year-End Reminders The earnings you take out are taxable and may be hit with the 10% early distribution penalty if you are under 59½. Your custodian calculates the net income attributable to the excess using a formula that prorates the account’s overall gains or losses during the period the excess was held.22eCFR. 26 CFR 1.408-11 – Net Income Calculation for Returned or Recharacterized IRA Contributions
If you already filed without pulling out the excess, you still have a six-month grace period from the original filing deadline (not including extensions); use it by filing an amended return noting the correction. After that window, removing the excess going forward stops future 6% penalties but does not erase the tax for any year the excess sat in the account at year-end. Report the penalty on Form 5329.23Internal Revenue Service. Instructions for Form 5329 (2025)
Forms You May Need to File
Three forms handle most IRA reporting. Your custodian files Form 5498 each year to report your contributions, rollovers, conversions, recharacterizations, and year-end fair market value. You do not file it yourself, but its figures should match your records.
Form 8606 is your responsibility whenever you make non-deductible Traditional IRA contributions or take distributions from an IRA containing both pre-tax and after-tax money. It tracks your cost basis so you are not taxed on dollars you already paid tax on.8Internal Revenue Service. Instructions for Form 8606 (2025) Skipping it does not change the tax owed, but it makes proving your basis harder if the IRS questions a distribution later.
Form 5329 covers the penalty taxes: the 10% (or 25%) early distribution penalty, the 6% excess contribution excise tax, and the 25% RMD shortfall penalty. If your Form 1099-R already shows the correct distribution code for a fully taxable early distribution, you can sometimes report the 10% penalty directly on your return without a separate Form 5329.23Internal Revenue Service. Instructions for Form 5329 (2025) Anytime you claim an exception to a penalty or correct an excess contribution, the form is required.