A Traditional IRA is a savings plan that allows individuals to set aside money for retirement. In the case of a Traditional IRA, accountholders may also be offered an immediate tax shelter for the contributions made to their account.
In this article, we're going to discuss many of the different rules encountered with Traditional IRAs. That discussion will include eligibility, contributions, income limits, as well as withdrawals from these accounts.
Traditional IRA Eligibility Rules
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In order to make a contribution to a Traditional IRA, individuals only need to pass two tests or rules. The first has to do with age. The accountholder must be under the age of 70 1/2 at the end of the calendar year. After age 70 1/2, individuals are no longer eligible to contribute to a Traditional IRA.
The second eligibility test has to do with compensation. In order to contribute to a Traditional IRA, an individual must have some form of compensation. This includes wages, salaries, bonuses, and commissions. Compensation does not include deferred compensation, or payments such as interest income and stock dividends received during the year.
IRA Income and Compensation Limits
In this next section, we are going to talk about income limitations for making a tax-deductible contribution, which involves rules that have been established by the IRS.
Tax-deductible Traditional IRA contributions are subject to an income phase-out rule. This means that starting at a certain level of modified adjusted gross income, or AGI, the ability to take a tax deduction is phased-out.
There is a note to this rule that is important to understand. If the accountholder or their spouse is covered by a qualified retirement plan at work, then the phase-out for the deduction takes place at a lower level of income. If someone's not sure if they are covered by a qualified retirement plan, there is a very easy way to find out. Take a look at a W-2 issued by the employer, and there is a "Retirement Plan" box. If this box is checked, this person was covered by a qualified plan.
The four tables below contain the Traditional IRA income limits for 2020 and 2021:
2020 Traditional IRA AGI Deduction Limits (If Covered by a Retirement Plan at Work)
Filing Status | Full Deduction | Phase-Out | No Deduction |
Single, head of household | $65,000 or less | $65,000 - $75,000 | $75,000 or more |
Married filing jointly | $104,000 or less | $104,000 - $124,000 | $124,000 or more |
Married filing separately | Less than $10,000 | $10,000 or more |
2020 Traditional IRA AGI Deduction Limits (If NOT Covered by a Retirement Plan at Work)
Filing Status | Full Deduction | Phase Out | No Deduction |
Single, head of household | No Limit | No Limit | No Limit |
Married filing jointly (spouse not covered) | No Limit | No Limit | No Limit |
Married filing jointly (spouse covered) | $196,000 or less | $196,000 - $206,000 | $206,000 or more |
Married filing separately (spouse covered) | Less than $10,000 | $10,000 or more |
2021 Traditional IRA AGI Deduction Limits (If Covered by a Retirement Plan at Work)
Filing Status | Full Deduction | Phase-Out | No Deduction |
Single, head of household | $66,000 or less | $66,000 - $76,000 | $76,000 or more |
Married filing jointly | $105,000 or less | $105,000 - $125,000 | $125,000 or more |
Married filing separately | Less than $10,000 | $10,000 or more |
2021 Traditional IRA AGI Deduction Limits (If NOT Covered by a Retirement Plan at Work)
Filing Status | Full Deduction | Phase Out | No Deduction |
Single, head of household | No Limit | No Limit | No Limit |
Married filing jointly (spouse not covered) | No Limit | No Limit | No Limit |
Married filing jointly (spouse covered) | $198,000 or less | $198,000 - $208,000 | $208,000 or more |
Married filing separately (spouse covered) | Less than $10,000 | $10,000 or more |
IRA Contribution Limits
Up to this point, we've outlined the complete eligibility picture for a Traditional IRA, the basics of participation, and the limits of participation. In this next section, we're going to answer the question of maximum contributions. We're going to start with some of the general rules that apply to everyone, and then work our way to the more detailed and complex contribution rules and limits.
The table below displays the limits for 2007 through 2021, including catch-up contributions. Regardless of whether or not these contributions are tax deductible, these are the limits, with one exception. Individuals cannot contribute more to a Traditional IRA than their compensation for the calendar year. For example, if someone earns $2,500 in compensation for the year, they can only contribute $2,500 to a Traditional IRA even though the limit for 2021 is $6,000.
The same rule applies when filing a joint return. If total compensation (taxpayer plus their spouse) is $5,000, then the total of all IRA contributions (including a Roth IRA) cannot exceed $5,000. Subject to the compensation limitations that were previously explained, those filing a joint return can make two contributions to a Traditional IRA, one for each spouse.
IRA Contribution and Catch-Up Limits
Year | Standard Contribution | Catch-Up Contribution |
2007 | $4,000 | $5,000 |
2008 to 2012 | $5,000 | $6,000 |
2013 | $5,500 | $6,500 |
2014 | $5,500 | $6,500 |
2015 | $5,500 | $6,500 |
2016 | $5,500 | $6,500 |
2017 | $5,500 | $6,500 |
2018 | $5,500 | $6,500 |
2019 | $6,000 | $7,000 |
2020 | $6,000 | $7,000 |
2021 | $6,000 | $7,000 |
2022 | Index to Inflation |
Note: The catch-up limit applies to individuals that have reached the age of 50 or older. In 2022 and beyond, these limits will be indexed for inflation. Standard contributions can move up in $1,000 increments, while the catch-up contributions can move up in $500 increments in future years. Generally, new limits are published in late October.
We discuss this topic in more detail in our article on IRA Contribution Limits.
IRA Distributions and Withdrawals
Accountholders can take a qualified distribution, or withdrawal, from an IRA after age 59 1/2. Before age 59 1/2, removing money from an IRA is considered an early withdrawal. Unless there is a qualifying exception, which is discussed in our article on IRA Withdrawals, then taking an early withdrawal from an IRA subjects the accountholder to an additional 10% tax penalty.
This 10% penalty is in addition to any federal income tax due on the amounts distributed. That would include any money put into the IRA account on a tax-deferred basis, since Traditional IRAs also allow for contributions on an after-tax basis (non-deductible contributions).
Minimum Required Distributions
Starting at age 70 1/2, Traditional IRAs also have minimum required distributions, or MRDs. This is money the IRS expects the accountholder to remove from their account each year starting at age 70 1/2. This topic has been covered more thoroughly in our article on Minimum Required Distributions. We've also prepared a Minimum Required Distribution Calculator to help estimate these withdrawals.
If someone does not take their minimum required distribution from a Traditional IRA, the amounts not withdrawn are subject to an additional 50% tax penalty.
IRA Rollovers
An IRA Rollover is defined as a tax-free distribution taken from a retirement account and contributed to an IRA. There are several different kinds of retirement accounts that can be rolled-over into a Traditional IRA, including another Traditional IRA, an employer's qualified plan such as a 401(k) plan, deferred compensation plans (section 457 plan), and a tax-sheltered annuity plan such as a 403(b).
Transferring IRA Money
There are two ways of moving funds between financial institutions: performing a transfer or doing a rollover. In most cases, it is far easier to do a transfer than a rollover.
Direct Transfers: the accountholder makes arrangements with a financial institution to receive funds from their current institution. The receiving institution then sends a request to the disbursing institution, requesting a transfer of IRA funds.
Rollovers: the retirement funds are distributed from the disbursing institution directly to the former accountholder. This means a check is sent directly to an individual, not another institution.
Direct transfers do not have to be reported to the IRS; however, rollovers need to be reported. This reporting ensures the individual receiving this money abides by the rollover rules, and deposits the money into another qualifying retirement account in a timely manner. Rollovers are also subject to 20% withholding, which is discussed in more detail in our article: IRA Rollovers.
Traditional versus Roth IRA
Individuals that do not qualify to make a tax-deductible contribution to a Traditional IRA have the option of making a contribution that is not tax deductible. Before doing so, explore the option of contributing to a Roth IRA.
For some taxpayers, a Traditional IRA allows them to take an immediate deduction from income taxes as discussed above, thereby providing the taxpayer with immediate tax relief. However, when making a withdrawal from a Traditional IRA, all of the money that was never subject to federal taxes becomes taxable at withdrawal.
With a Roth IRA, it's not possible to receive an immediate tax deduction for any of the amounts placed into the account. However, all monies withdrawn from a Roth IRA are not subject to federal income taxes. This means taxes are not owed on capital gains or interest income.
IRA Calculators
We're going to close this article with a quick mention of our online calculators. We offer a complete line of retirement calculators, including those that can help users model their retirement income, funding, and even help users choose between a Roth and a Traditional IRA.
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