IRA Rules: Your 2021 Cheat Sheet

Here are the income limits, eligibility requirements, tax treatment and withdrawal rules for traditional IRAs.

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While the traditional IRA shares many characteristics with its newer sibling, the — both offer tax incentives for saving for retirement and early withdrawals under certain circumstances — each is governed by a distinct set of rules.

Taxes and early withdrawals work differently for a Roth. See our explainer on for details.

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, the annual contribution limit is $6,000 in 2021 ($7,000 if age 50 or 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.

» Compare options: See our full analysis of the .

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 up to the limit. See the table below for the income limits when access to a workplace savings plan enters the picture.

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:

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.

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 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:

(For more details on exceptions to the age 59½ rule, see .)

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 are more complex.

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