Chapter 3 — Individual Retirement Annuities

The tax code sets the maximum annual IRA contribution but does not require an individual to contribute the maximum. However, if a person does not contribute the full amount in a given year, they may not make up the shortfall in a future year. Each year’s unused contribution limit is permanently forfeited.

An individual may hold more than one IRA account. However, the annual dollar limit applies to the combined total contributions across all IRAs. Opening additional accounts does not increase the contribution ceiling.

If an individual contributes more than permitted, the excess is subject to a 6% excise tax for each year the excess remains in the account. This tax is cumulative — it continues to apply annually until the error is corrected.

To avoid the penalty, the excess contribution (plus any earnings attributable to it) should be withdrawn by the tax filing deadline (April 15 of the following year). IRA holders who have made excess contributions in prior years may also correct the situation by underfunding the account in a future year — but prior underfunding cannot be applied to cure a current excess.

An individual retirement annuity is an IRA established through the purchase of an annuity or endowment contract from a life insurance company, rather than as a traditional trust or custodial account. The same annual contribution limits apply. The annuity contract must meet specific IRS requirements:

• the contract must be non-transferable by the owner,
• the owner’s interest must be non-forfeitable,
• the annual premium may not exceed the applicable IRA contribution limit, and
• distributions must satisfy the IRA required minimum distribution rules.

Life insurance protection within an individual retirement annuity is limited — the cost of life insurance coverage within the annuity contract counts against the annual contribution limit and is not deductible.

All new IRA contributions must be made in cash, which includes:

• personal checks or money orders,
• wire transfers,
• electronic funds transfers, and
• credit card advances (the contribution is valid even if the credit card balance is not paid before the tax return deadline).

Contributions of property (such as stock, real estate, or other assets) to an IRA are not permitted as new contributions. However, property may be transferred to an IRA via rollover or trustee-to-trustee transfer from another qualified plan or IRA. The IRA custodian may then use the cash contribution to purchase securities or other investments at the owner’s direction (in a self-directed IRA).

There are no limits on amounts rolled over or transferred trustee-to-trustee into an IRA from another qualified plan or from another IRA.

An IRA owner may contribute at any time during the tax year, or up to the normal tax filing deadline (generally April 15 of the following year) for that tax year. Unlike most other qualified plans, this deadline is not extended by tax filing extensions.

Contributions made between January 1 and April 15 must be designated by the owner as either the prior year’s or the current year’s contribution. If the owner does not specify, the IRA custodian must treat the contribution as being for the current tax year.

A taxpayer may also claim an IRA deduction on a tax return before actually making the contribution — provided the contribution is made by the April 15 deadline. If the contribution is not ultimately made, the taxpayer must file an amended return to remove the deduction.

Spousal IRAs allow a working spouse to contribute on behalf of a non-working (or lower-earning) spouse. Requirements:

• the couple must be married and file a joint return,
• each spouse maintains a separate IRA account — joint IRA accounts are not permitted, and
• the combined contribution to both accounts may not exceed the lesser of the couple’s combined compensation or twice the annual individual limit (2 × $7,500 = $15,000 for 2026, if both are under age 50).

Neither individual account may receive more than the single-person annual limit ($7,500 under age 50 / $8,600 age 50+ for 2026).

Divorced individuals may continue to contribute to a previously established spousal IRA. For this purpose, taxable alimony received under agreements finalized before January 1, 2019 is treated as earned compensation.

Whether a traditional IRA contribution is deductible depends on whether the contributor (or their spouse) is an active participant in a workplace retirement plan, and on their income.

An employee is an active participant if they are eligible to participate in any of the following types of plans during any part of the tax year:

• qualified pension, profit-sharing, or stock bonus plans (including 401(k) plans),
• qualified annuity plans,
• tax-sheltered annuity plans (403(b) plans),
• Simplified Employee Pensions (SEPs),
• SIMPLE plans, or
• plans established by a state, local, or federal government or agency.

Active participant status does not depend on whether contributions were actually made to the plan, or whether the employee is vested. Eligibility alone is sufficient.

Active participant status is reported on the employee’s Form W-2. A worker receiving retirement benefits from a former employer’s plan but not eligible under the current employer’s plan is not an active participant.

For active participants, the IRA deduction phases out over these 2026 MAGI ranges:

Above the phase-out ceiling, the contribution is entirely nondeductible, though the individual may still make a nondeductible IRA contribution. Within the phase-out range, a partial deduction is available.

Individuals whose deduction is reduced or eliminated may still make nondeductible contributions to a traditional IRA, up to the annual limit. While there is no immediate tax benefit, the account still provides tax-deferred growth on the earnings.

Key requirements for nondeductible contributions:

• The contributor must file Form 8606 with their tax return each year nondeductible contributions are made, to establish and track the after-tax basis.
• Failure to file Form 8606 results in a $50 penalty. Overstating nondeductible contributions results in a $100 penalty and the IRS will fully tax all distributions as if no basis existed.
• The contributor may designate a contribution as nondeductible (or revoke the designation) at any time up to the tax filing deadline for the year.
• Both deductible and nondeductible contributions may be held in a single IRA account — the institution holding the IRA does not need to be notified of the nondeductible status.

When distributions are taken from an IRA containing nondeductible contributions, the pro-rata rule applies across all traditional IRA accounts — withdrawals cannot be selectively allocated to the nondeductible basis. The tax-free portion of each distribution is calculated proportionally based on total basis relative to total account value.

In most cases, a Roth IRA offers a better result than a nondeductible traditional IRA, since Roth distributions are entirely tax-free for qualified withdrawals. However, individuals who exceed the Roth IRA income limits may use a nondeductible traditional IRA as an alternative tax-deferred savings vehicle.