Individual Retirement Account (IRA)

The tax code’s formal name is individual retirement arrangement: a trust or custodial account, or an annuity contract from an insurer, held for your exclusive benefit. You pick the custodian and the investments, such as funds, stocks, bonds or CDs, and the growth isn’t taxed from year to year. What separates the IRA types is when income tax is paid. A traditional IRA may give you a deduction now and taxes withdrawals later; a Roth IRA takes after-tax money and can pay out tax-free.

Contributions must be money, not shares or other property, and can’t exceed your taxable compensation, mainly wages, salaries, tips, commissions and net self-employment earnings. Interest, dividends, rent, pensions and Social Security don’t count. A retiree living only on investments therefore can’t contribute. The one exception to using your own earnings is the spousal IRA rule for married couples who file jointly.

You can contribute for a tax year from January 1 until your return’s due date, not counting extensions, which for 2026 contributions is generally April 15, 2027. A deposit made between January 1 and that date can count for either year, so tell the custodian which one you mean. Money moved in from a 401(k) or another IRA doesn’t count toward the annual limit.

The annual limit belongs to you, not to each account. For 2026 you can put up to $7,500 in total into all of your traditional and Roth IRAs, plus a $1,100 catch-up if you are 50 or older by December 31, for $8,600. If your taxable compensation is lower than the limit, your compensation is the limit. There is no maximum age for contributing to either type.

Income never changes the $7,500 ceiling itself. It decides two other things: whether a traditional contribution is deductible, which matters only if you or your spouse is covered by a workplace retirement plan, and whether you can contribute to a Roth IRA directly. For 2026 the Roth phase-out runs from $153,000 to $168,000 of modified AGI for single filers and from $242,000 to $252,000 on a joint return. Above those ranges a nondeductible traditional contribution is still allowed, which is the first step of a backdoor Roth IRA.

Put in more than your limit and the excess owes a 6% excise tax for every year it stays in the account. You avoid the tax by withdrawing the excess, with its earnings, by your return’s due date including extensions. Employer-funded IRAs follow separate limits, shown in the table below.

Traditional and Roth IRAs are the two personal accounts. The other names describe who puts the money in or where it came from, and each still follows traditional or Roth tax rules underneath. A SEP IRA receives contributions from an employer or a self-employed person’s own business, and a SIMPLE IRA takes salary deferrals plus required employer money at a small company; since 2023 either can be designated Roth.

A rollover IRA is an ordinary traditional or Roth IRA that received money from a workplace plan. An inherited IRA follows beneficiary rules instead: a beneficiary other than a spouse can’t add contributions or treat the account as their own, and most must empty it within 10 years.

A 401(k) is run by your employer and funded through payroll; an IRA is yours alone, and that difference drives most of the trade-offs. The 401(k) employee limit for 2026 is $24,500, more than three times the IRA limit, and many plans add an employer match. An IRA offers a wider choice of investments and custodians, and it doesn’t change when you change jobs.

You can use both in the same year. A workplace plan never blocks an IRA contribution; it only limits the traditional IRA deduction, which for 2026 starts phasing out at $81,000 of modified AGI for a covered single filer and $129,000 for a covered spouse on a joint return.

Withdrawal rules differ at the edges. The rule of 55 lets you leave a job in or after the year you turn 55 and draw on that employer’s plan without the 10% early withdrawal tax, but it doesn’t apply to IRAs. IRAs alone allow penalty-free early withdrawals for a first home, up to $10,000 over your lifetime, and for qualified higher education costs. A 401(k) may lend you money; an IRA can’t, and pledging part of an IRA as security for a loan makes that part a taxable distribution.

Most IRA problems come from rules that apply to the owner rather than the account: one annual limit and one 60-day rollover per 12 months across every IRA you own, and a contribution deadline that doesn’t move when you extend your return. They are easy to break when accounts sit at different custodians that can’t see each other. These slips most often cost extra tax or a lost year of savings: