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.
Here’s the breakdown of traditional IRA rules by category:
Traditional IRA contribution rules
Having earned income is a requirement for contributing to a traditional IRA. Additionally, your annual contributions to an IRA cannot exceed what you earned that year. Otherwise, for 2019 the annual contribution limit is $6,000 for those younger than 50 and $7,000 for those 50 and older. (That’s up from $5,500 and $6,500 in 2018.)
Here are some other 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. Here, too, 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. (Note that income limits apply to traditional IRAs only if you, or your spouse, has a retirement plan at work.) 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.
You’re not allowed to make contributions to a traditional IRA past a certain age. This rule differs from the one for a Roth IRA. The IRS does not allow you to contribute to a traditional IRA once you reach the year you turn age 70½. With a Roth you’re free to continue funding the account as long as you draw breath and earn income.
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 our analysis of the best brokers for 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 2019
|Filing status||Full deduction if modified AGI is ...||Partial deduction if modified AGI is ...||No deduction if modified AGI is ...|
|Married filing jointly and you're covered by retirement plan at work||$103,000 or less||More than $103,000 but less than $123,000||$123,000 or more|
|Married filing jointly and your spouse is covered by a retirement plan at work||$193,000 or less||More than $193,000 but less than $203,000||$203,000 or more|
|Single or head of household and you are covered by a retirement plan at work||$64,000 or less||More than $64,000 but less than $74,000||$74,000 or more|
|Married filing separately and you or your spouse is covered by a retirement plan at work||Not available||Less than $10,000||$10,000 or more|
The upfront tax break is one of the main things that differentiates a traditional from a Roth IRA, in which no tax deduction is allowed 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 withdrawal rules
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 70½ 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.
If you don’t start taking RMDs by April 1 of the year following the calendar year in which you reach age 70½ (and every year after), you should 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 rule 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
(For more details on exceptions to the age 59½ rule, see Traditional IRA Withdrawal 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.