Key Points
Establishing a Traditional IRA
Almost anyone with earned income can establish and contribute to a traditional Individual Retirement Account. Employees and self-employed persons may open IRAs for themselves even if they already participate in tax-qualified, employer-sponsored plans. Participants in governmental plans may also open an IRA.
An individual may open more than one IRA, but the combined contributions to all IRAs (traditional and Roth) may not exceed the annual limit.
Children with earned income (from after-school jobs, summer employment, etc.) are eligible to open IRAs. Retired persons may contribute as long as they receive earned compensation such as part-time employment or consulting fees. Individuals of any age may set up a rollover IRA by rolling over a distribution from another qualified plan, regardless of whether they have current earned income.
In the case of a married couple where both spouses are employed, each spouse may establish their own IRA and contribute up to the annual limit based on their individual compensation.
If only one spouse works, the employed spouse may establish a spousal IRA for the non-working spouse. Key rules for spousal IRAs:
- The spouses must be married and file a joint tax return.
- Each spouse maintains a separate IRA account — spouses may not open a joint IRA.
- The total contribution to both accounts combined may not exceed the lesser of: the couple’s combined compensation, or twice the annual contribution limit (i.e., 2 × $7,500 = $15,000 for 2026 if both are under age 50).
- The contribution may be split between the two accounts in any proportion, but neither account may receive more than the individual annual limit.
Earned Income Requirement
To establish or contribute to a traditional IRA, a person must receive earned income during the year. Earned income for IRA purposes includes:
- wages, salaries, and professional fees received for personal services rendered,
- sales commissions and compensation based on a percentage of profits,
- commissions on insurance premiums,
- tips and bonuses,
- taxable alimony and separate maintenance payments received under a divorce or separation decree (for agreements finalized before January 1, 2019), and
- net earnings from self-employment in a trade or business in which the individual actively participates.
Mere ownership of a business is not sufficient — the self-employed individual must actually provide income-producing services to the business. For active partners in a partnership, earned compensation includes the partner’s share of partnership income attributable to services rendered. A silent or passive partner’s share of partnership income does not count.
A self-employed person’s IRA contribution is calculated on net self-employment income after deducting any Keogh (qualified plan) contributions made on their own behalf.
Jake Grossman, age 74, is a retired freelance writer who still earns income from articles. This year he earned $6,000 for writing services and contributed 20% (approximately) to his Keogh plan — $1,200. For IRA purposes, his earned compensation is $6,000 − $1,200 = $4,800. He may contribute up to $4,800 to his traditional IRA (not the full $8,600 limit, since his compensation is less). Note: under current law, his age 74 does not restrict his ability to contribute — the age-70½ rule was eliminated in 2020.
The following types of income do not qualify as earned income for IRA contribution purposes:
- dividends, interest, or capital gains (investment income),
- rental income,
- pension or annuity payments,
- Social Security benefits,
- deferred compensation (e.g., stock options, stock appreciation rights),
- foreign income excluded from U.S. taxation, and
- disability payments not includible in gross income.
The IRS will disallow an IRA deduction if the taxpayer cannot demonstrate receipt of qualifying earned compensation.
Contribution Limits
Annual IRA contributions are limited to the lesser of:
- the applicable dollar limit (below), or
- 100% of the individual’s taxable compensation for the year.
| Age | 2026 Annual Limit | Catch-Up | Total |
|---|---|---|---|
| Under age 50 | $7,500 | — | $7,500 |
| Age 50 and older | $7,500 | $1,100 | $8,600 |
These limits apply to the combined total of all traditional and Roth IRA contributions. For example, if an individual contributes $4,000 to a Roth IRA, they may contribute at most $3,500 to a traditional IRA (total $7,500, assuming under age 50).
IRA contributions for a tax year may be made any time from January 1 of that year through the tax filing deadline (generally April 15 of the following year, not including extensions).
Whether a traditional IRA contribution is tax-deductible depends on two factors: whether the contributor is covered by a workplace retirement plan, and their modified adjusted gross income (MAGI).
If neither the contributor nor their spouse participates in any employer-sponsored retirement plan, the full contribution is deductible regardless of income.
For those covered by a workplace plan (or whose spouse is covered), the deduction phases out over the following 2026 MAGI ranges:
| Filing Status / Coverage | Full Deduction Below | No Deduction Above |
|---|---|---|
| Single/HOH — covered by workplace plan | $79,000 | $89,000 |
| MFJ — covered spouse | $126,000 | $146,000 |
| MFJ — non-covered spouse (covered by other plan) | $236,000 | $246,000 |
| MFS — covered by workplace plan | $0 | $10,000 |
Within a phase-out range, a partial deduction is available. The deductible amount is calculated proportionally based on where the contributor falls within the range.
The tax treatment of IRA withdrawals depends on whether contributions were deductible:
- Fully deductible IRA: All withdrawals — both the original contributions and all earnings — are taxable as ordinary income in the year received. No portion is tax-free.
- Nondeductible IRA: The after-tax contributions represent the owner’s basis in the account. Using the exclusion ratio, a pro-rata portion of each withdrawal is treated as tax-free return of basis, and the remainder is taxable as ordinary income. Owners must track their basis on Form 8606 filed each year nondeductible contributions are made.
- Mixed IRA: If an IRA contains both deductible and nondeductible contributions, the pro-rata rule applies across all traditional IRA accounts — withdrawals cannot be allocated solely to the nondeductible basis.
Traditional IRA owners must begin taking required minimum distributions (RMDs) by April 1 of the year following the year they reach the applicable RMD age:
- Age 73 — for individuals born between January 1, 1951 and December 31, 1959.
- Age 75 — for individuals born after December 31, 1959 (effective 2033).
Each year’s RMD is calculated by dividing the prior year-end account balance by the applicable life expectancy factor from the IRS Uniform Lifetime Table. The penalty for failing to take the full RMD is 25% of the shortfall — reduced to 10% if corrected within the two-year correction window (SECURE Act 2.0).
Withdrawals from a traditional IRA before age 59½ are generally subject to a 10% early withdrawal penalty in addition to ordinary income tax. Exceptions to the penalty include (but are not limited to):
- death or permanent disability,
- substantially equal periodic payments (SEPPs / 72(t) distributions),
- unreimbursed medical expenses exceeding 7.5% of AGI,
- health insurance premiums paid while unemployed,
- qualified higher education expenses,
- first-time home purchase (up to $10,000 lifetime),
- qualified reservist distributions,
- terminal illness (SECURE Act 2.0),
- domestic abuse (up to $10,000, SECURE Act 2.0), and
- emergency personal expenses (up to $1,000/year, SECURE Act 2.0).