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While the traditional IRA shares many characteristics with its newer sibling, the Roth IRA — both offer tax incentives for saving for retirement and early withdrawals under certain circumstances — each is governed by a distinct set of rules.
Quick summary of IRA rules
The maximum annual contribution limit for 2020 is $6,000 (or $7,000 if you’re age 50 or older).
Contributions may be tax-deductible in the year they are made.
Investments within the account grow tax-deferred.
Withdrawals in retirement are taxed as ordinary income.
The IRS requires individuals to begin taking money out of the account at age 72. (People who turned 70½ in 2019 or earlier were required to start distributions then.)
Unqualified withdrawals before age 59½ may trigger a 10% early withdrawal penalty and income taxes.
Taxes and early withdrawals work differently for a Roth. See our explainer on Roth IRA rules for details.
Traditional IRA contribution rules
Having earned income is a requirement for contributing to a traditional IRA, and your annual contributions to an IRA cannot exceed what you earned that year. Otherwise, for 2020 the annual contribution limit is $6,000 for those younger than 50 and $7,000 for those 50 and older.
Here are some other traditional IRA rules related to contributions:
You can contribute to a traditional IRA and a Roth IRA in the same year. If you qualify for both types, make sure your combined contribution amount does not exceed the annual limit.
You can also contribute to a traditional IRA and a 401(k) in the same year. Contribution limits for each type of account apply.
If you don’t qualify to make a deductible contribution, you can still put money in a traditional IRA. With a Roth IRA, if you make too much money, the option to contribute to an account is off the table. The traditional IRA keeps the window open a crack and allows contributions — but not a deduction. (As a consolation prize for being denied the upfront tax break, the IRS delays taxes on investment growth until you withdraw those earnings in retirement. Meanwhile, the contributions you put in after-tax come out in retirement tax-free.) Keep in mind that income limits apply to traditional IRAs only if you, or your spouse, has a retirement plan at work. If neither you nor your spouse has a retirement plan at work, your contributions (up to the annual maximum) are fully deductible.
There is no minimum required amount for opening an IRA, and no rules about how much money you must deposit. Note that brokers set their own account minimums, but the requirement is often lower for IRAs versus a regular taxable account. At some brokers it's even $0. For more on your brokerage options, see the comparison below or our full analysis of the best IRA accounts.
Traditional IRA deduction rules
With the contribution rules out of the way, it’s time to find out how much of that contribution (if any) you’re allowed to deduct from your taxes.
The answer to the deductibility question is based on your income and whether you or your spouse is covered by an employer-sponsored retirement plan, such as a 401(k). If neither of you has access to a workplace savings plan, you can deduct all of your contributions (remember, the maximum contribution is $6,000, or $7,000 if you're 50 or older). See the table below for the income limits when access to a workplace savings plan enters the picture.
Traditional IRA income limits for 2020 and 2019
These income limits apply only if you (or your spouse) have a retirement plan at work.
The upfront tax break is one of the main things that differentiates traditional IRA rules from Roth IRA rules, in which allow no tax deduction for contributions.
It’s also one of the things that makes a traditional IRA particularly beneficial for high earners. It reduces taxable pay for the year, whether or not the saver itemizes deductions on their tax return.
There are two key things to know about the tax treatment of traditional IRA dollars in addition to the potential tax deductibility of contributions:
Investments in a traditional IRA grow tax-deferred. As long as the money remains in the IRA, all gains — even ones generated by selling appreciated investments — remain off of Uncle Sam’s tax radar.
But those taxes are due when money is withdrawn from a traditional IRA. You got an upfront tax break. The IRS didn’t tax investment growth. You didn’t think you’d get out of paying taxes forever, right?
A traditional IRA makes sense for people who think they’ll be in a lower tax bracket in retirement.”
Withdrawals (or distributions) from a traditional IRA are taxed as income. How much depends on your current tax rate. This is why a traditional IRA makes sense for people who think they’ll be in a lower tax bracket in retirement: They get the deduction during their higher earning years when it’s worth more.
Because Roth distributions are not taxed, it’s a better deal if you’re in a higher tax bracket in retirement.
Traditional IRA rules for withdrawals
Age 59½ may not be widely considered a milestone birthday, but in IRS circles it is notable for being the age at which individuals are allowed to start making withdrawals from their IRAs. Tapping the account before that age can trigger a 10% early withdrawal penalty and additional income taxes.
Age 72 is another one to mark on the calendar. This is when investors who have saved in a traditional IRA are required to start taking required minimum distributions, or RMDs. (Note: Until the end of 2019, 70½ was the age when minimum distributions were required to start.)
If you don't take RMDs, brace yourself for the IRS’s punishing 50% excise tax on the required amount not withdrawn.
Need the money before age 59½? There are exceptions to the rule requiring account holders to wait. ”
Need the money sooner? There are exceptions to the traditional IRA rules requiring account holders to wait until age 59½ for withdrawals. You’ll still pay income taxes on distributions, but you may be able to avoid the pricey 10% penalty for making an early traditional IRA withdrawal in these instances:
You have qualified higher education expenses for yourself, your spouse, or children or grandchildren of yours or your spouse
You are using a distribution of up to $10,000 to buy, build or rebuild a first home
You have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
You are in the military and are called to active duty for more than 179 days
You have become totally and permanently disabled
You are the beneficiary of a deceased IRA owner
In the year you become a parent — through birth or adoption — you can withdraw up to $5,000 from your IRA (thanks to the new Secure Act, which went into effect in 2020)
(For more details on exceptions to the age 59½ rule, see Traditional IRA Withdrawal Rules.)
Compared to traditional IRA rules, Roth IRA withdrawal rules are quite different: Penalty-free and tax-free withdrawals of contributions are allowed at any time, which is what makes the Roth a better option if you absolutely must tap into your retirement savings early. However, when it comes to tapping into earnings, the Roth withdrawal rules are more complex.
» Ready to get started? See our roundup of the top IRA account providers for both traditional and Roth IRAs.