Individual retirement account (IRA)

An individual retirement account (IRA) is a tax-advantaged savings account you open yourself, at a brokerage, bank, or credit union, rather than through an employer. Congress created IRAs in 1974 for workers without workplace pensions, and they have since grown into one of the largest pools of retirement money in the country, partly because departing employees so often roll old 401(k) balances into them.

IRAs come in two main varieties. The traditional IRA, the subject of this article, gives many savers a tax deduction now and taxes withdrawals later. The Roth IRA reverses the deal: no deduction today, tax-free withdrawals in retirement. The two share a single contribution limit, so dollars placed in one reduce what you can put in the other.

Compared with a workplace plan, an IRA offers far more investment choice and no dependence on an employer's menu or fees, at the cost of a much lower contribution ceiling and no matching money. For most people the two work together rather than compete, a division of labor sketched in retirement planning.

How a traditional IRA works#

You can contribute to a traditional IRA at any age as long as you have compensation: wages, salary, tips, or self-employment earnings ¹. Investment income, pension checks, and Social Security do not count, though someone working part time in retirement can keep contributing from those earnings. The old rule that stopped contributions at age 70 1/2 was repealed starting in 2020 ¹.

Money inside the account grows without annual tax on interest, dividends, or capital gains. Withdrawals are taxed as ordinary income, and withdrawals before age 59 1/2 usually face an extra 10 percent tax on top. The design assumes the money stays put for decades, and most of the rules below are about what happens when it moves.

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Contribution limits for 2026#

In 2026 you can contribute up to $7,500 across all your IRAs, traditional and Roth combined, or $8,600 if you are 50 or older, thanks to a $1,100 catch-up contribution ². You cannot contribute more than you earned for the year, so someone with $5,000 of wages has a $5,000 limit. Contributions for a tax year can be made until the tax filing deadline the following April.

Contributing above your limit is a fixable but expensive mistake: excess amounts are taxed at 6 percent for every year they stay in the account ¹.

Sources for this section: [1] [2]

Deducting your contributions#

Anyone with compensation can contribute to a traditional IRA, but whether you can deduct the contribution depends on two things: whether you (or your spouse) are covered by a retirement plan at work, and your modified adjusted gross income (MAGI). If neither spouse has a workplace plan, contributions are fully deductible at any income. Otherwise, the deduction phases out across these 2026 income ranges ²:

If your income lands above the range, you can still make a nondeductible contribution. You report it on Form 8606, which tracks your after-tax basis so those dollars are not taxed twice on the way out. Nondeductible contributions are also the first step of the backdoor Roth strategy described in the Roth IRA article.

Sources for this section: [2]

Spousal IRAs#

The compensation rule has one important exception. A married couple filing jointly can fund IRAs for both spouses out of one spouse's earnings, up to the full limit for each, as long as their combined contributions do not exceed the working spouse's compensation ¹. In 2026 that means a couple with one paycheck can still put away up to $15,000, or $17,200 if both are 50 or older ².

The account belongs entirely to the spouse whose name is on it. Spousal IRAs matter most in years when one partner is home with children, caring for a parent, or already retired, since those are exactly the years a household's retirement saving would otherwise stall.

Sources for this section: [1] [2]

Rollovers and transfers#

Money moves between retirement accounts in two ways, and the difference is more than paperwork.

A trustee-to-trustee transfer sends money directly from one IRA custodian to another. You never touch it, nothing is withheld, and you can do it as often as you like ³. A rollover, strictly speaking, means the money is paid out to you first: you then have 60 days to deposit it into an IRA or another eligible account, and you may do only one IRA-to-IRA rollover in any 12-month period, no matter how many IRAs you own ³.

Moving a workplace plan balance into an IRA follows similar logic. Ask for a direct rollover and the check goes straight to the new custodian. Have the money paid to you instead and the plan must withhold 20 percent for taxes, which you would have to make up from other savings to complete a full rollover within the 60 days ³.

Caution: A missed 60-day deadline or a second IRA-to-IRA rollover within 12 months turns the entire amount into a taxable distribution, with penalties if you are under 59 1/2 ³. When in doubt, ask the receiving institution to pull the money over directly; direct transfers carry none of these tripwires.

Sources for this section: [3]

Creditor protection#

Federal bankruptcy law protects IRA savings from creditors, but only up to a cap. For a bankruptcy case filed between April 1, 2025 and March 31, 2028, the balance in a traditional IRA, combined with any Roth IRA the same person owns, is exempt up to $1,711,975; that ceiling is reset for inflation every three years ⁸⁹. Anything above it can be claimed to repay what is owed ⁸.

Money rolled in from an employer plan is handled separately. It keeps the unlimited protection it carried inside a 401(k) or similar plan and does not count toward the $1,711,975 cap, which leaves even a large rollover fully shielded ⁸⁹. Away from bankruptcy, how much of an IRA a creditor can reach is governed by state law rather than by this federal cap ⁸.

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Early withdrawals and the exceptions#

Distributions before age 59 1/2 are generally hit with a 10 percent additional tax on top of ordinary income tax ⁴. Congress has carved out a long list of exceptions, several of which do not exist for 401(k) money ⁵:

The exceptions waive the 10 percent penalty, not the income tax; a deductible IRA dollar is taxed whenever it comes out. And IRAs have no equivalent of the 401(k)'s rule of 55 (penalty-free withdrawals from a workplace plan after leaving that job at 55 or later, covered in retirement age), so a worker who retires at 56 gives up that early access by rolling the entire plan balance into an IRA.

Sources for this section: [4] [5]

Required minimum distributions#

Tax deferral runs out at age 73, when required minimum distributions (RMDs) begin; the first one can be pushed to April 1 of the following year, at the price of taking two that year ⁶. The annual amount comes from dividing the prior December 31 balance by an IRS life expectancy factor, a calculation walked through in required minimum distributions. If you own several IRAs, you calculate the RMD for each but may take the combined total from whichever ones you choose ⁶. Skipping one triggers an excise tax of 25 percent of the shortfall, cut to 10 percent if corrected within two years ⁶.

Charitably inclined owners get a useful valve: from age 70 1/2, a qualified charitable distribution can send up to $111,000 (the 2026 limit) directly from an IRA to charity, counting toward the RMD without ever appearing in taxable income ⁷. That interaction, and how RMDs affect tax brackets and Medicare premiums, is part of taxes in retirement. Whatever remains at death passes by beneficiary designation, which overrides a will, a point worth checking during estate planning.

Sources for this section: [6] [7]

When someone inherits your IRA#

Who the beneficiary is drives what happens next, and the rules changed for owners who died in 2020 or later ¹⁰. A surviving spouse who is the sole beneficiary keeps the widest set of choices, including treating the inherited IRA as their own and deferring withdrawals until their own RMD age ¹⁰.

Most other beneficiaries, often an adult child, fall under the 10-year rule: the whole balance has to come out by December 31 of the tenth year after the owner's death, which ended the older practice of stretching withdrawals across an heir's lifetime ¹⁰¹¹. If the owner had already reached their required beginning date, the heir also has to take a distribution in each of the intervening years, figured on the longer of their own or the owner's remaining life expectancy, instead of leaving the account untouched until year ten ¹⁰. A skipped distribution carries the same excise tax as any other missed RMD: 25 percent of the shortfall, or 10 percent if corrected within two years ⁶¹¹.

A few beneficiaries are exempt from the 10-year clock and may still draw the account down over their own life expectancy: a minor child of the owner (until they reach adulthood), a disabled or chronically ill beneficiary, and anyone not more than 10 years younger than the owner ¹⁰.

Sources for this section: [6] [10] [11]

How traditional compares with Roth#

The choice mostly turns on tax rates: a deduction is worth more in high-earning years, while tax-free withdrawals are worth more to people who expect equal or higher rates in retirement. Many savers end up holding both and choosing which to draw from year by year, a flexibility explored in retirement withdrawal strategies.

RetiredWiki. (2026, July 18). Individual retirement account (IRA). https://retiredwiki.com/article/individual-retirement-account