Overview: IRAs are the most widely owned retirement vehicles in America because they are open to almost anyone with earned income — but the tax treatment, contribution rules, and withdrawal rules differ sharply between traditional and Roth versions.

Traditional IRAs

A traditional IRA allows anyone with taxable earned income — wages, salaries, or self-employment income — to contribute up to $7,000 per year (2024), or $8,000 if age 50 or older ($1,000 catch-up). You cannot contribute more than your actual earned income for the year, and the total combined contribution across all IRAs (traditional and Roth) cannot exceed the annual limit.

Anyone can contribute to a traditional IRA regardless of income. What changes at higher incomes is whether the contribution is tax-deductible. Deductibility depends on two factors: whether you (or your spouse) are covered by an employer-sponsored retirement plan at work, and your Modified Adjusted Gross Income (MAGI).

If neither you nor your spouse participates in a workplace plan, your traditional IRA contribution is fully deductible regardless of income. If you or your spouse does participate, the deduction phases out at income thresholds that the IRS adjusts annually. For 2024, an individual covered by a workplace plan loses the full deduction if MAGI exceeds $87,000 (single) or $143,000 (married filing jointly). For a non-participating spouse whose partner has a workplace plan, the phase-out runs from $230,000 to $240,000 (2024).

Even when a contribution is not deductible, you can still make it — but you must track it using Form 8606 so you are not taxed twice when you withdraw that money. The IRS's pro-rata rule prevents you from withdrawing only your non-deductible basis; every distribution is treated as a proportional blend of pre-tax and after-tax amounts.

Roth IRAs

A Roth IRA flips the tax timing: contributions are made with after-tax dollars (no deduction), but qualified withdrawals — including all investment gains — are completely tax-free. A withdrawal is "qualified" if the account has been open at least five tax years and the participant is at least age 59½ (or is disabled, deceased, or a first-time homebuyer up to $10,000).

Unlike traditional IRAs, Roth IRAs have income limits that cap direct contributions entirely. For 2024, the ability to contribute to a Roth IRA phases out between $146,000 and $161,000 for single filers, and between $230,000 and $240,000 for married filing jointly. Above those ceilings, direct contributions are not allowed. However — and this is critical — there are no income limits on Roth conversions, which is why the "backdoor Roth IRA" strategy (contributing to a non-deductible traditional IRA and then converting) remains popular with high earners.

The most powerful long-term advantage of Roth IRAs: they have no required minimum distributions (RMDs) during the account owner's lifetime. Traditional IRA owners must begin RMDs at age 73 (or age 75 for those born in 1960 or later, under SECURE Act 2.0 changes). A Roth can compound indefinitely and pass to heirs tax-free, making it a superior estate-planning tool.

Spousal IRAs

A spousal IRA is not a special account type — it is a rule allowing a working spouse to fund an IRA in the name of a non-working or low-earning spouse. The couple must file a joint tax return, and the working spouse's earned income must be sufficient to cover both contributions. Each spouse can contribute up to the individual annual limit, and the non-working spouse owns the account entirely.

Rollover Rules and Tax Consequences

When leaving a job, employees typically need to move their retirement funds from a former employer's plan. The safest method is a direct rollover (trustee-to-trustee transfer), where funds move directly from one institution to another. No taxes are withheld, no 60-day clock runs, and there is no limit on how many direct rollovers you can do.

The riskier alternative is an indirect rollover, where the funds are paid to the employee, who then re-deposits them into a new plan. This triggers mandatory 20% federal income tax withholding from employer plan distributions. To avoid tax, the employee must deposit the full original amount (including the withheld 20%) into the new account within 60 days. If they can only deposit the net amount, the 20% withheld is treated as a taxable distribution — and also subject to the 10% early withdrawal penalty if the employee is under 59½.

For IRA-to-IRA indirect rollovers, the one-rollover-per-12-month rule applies: you may only do one such rollover in any rolling 12-month period across all your IRAs combined. This limit does not apply to direct transfers or to rollovers from employer plans to IRAs.

Missing the 60-day window converts the distribution to taxable income. If the money is later deposited into an IRA anyway, the IRS treats it as an excess contribution subject to a 6% annual excise tax until withdrawn. The IRS does allow "self-certification" relief if the failure was due to approved circumstances (bank error, hospitalization, etc.), but this requires careful documentation.

Early Withdrawals and Exceptions

The general rule: withdrawals from traditional IRAs, 401(k)s, and most other pre-tax plans before age 59½ are subject to ordinary income tax plus a 10% early withdrawal penalty. SIMPLE IRAs impose a 25% penalty (not 10%) if the withdrawal occurs within the first two years of plan participation.

Important exceptions to the 10% penalty include:

Death or permanent disability
Substantially Equal Periodic Payments (72(t) distributions): A series of calculated annual distributions based on life expectancy, which must continue for at least five years or until age 59½, whichever is longer
The Rule of 55: Separation from service in or after the calendar year you turn 55, applicable to that employer's plan only (not IRAs)
Medical expenses exceeding 7.5% of AGI
Health insurance premiums while unemployed (IRAs only)
Qualified higher education expenses (IRAs only)
First-time home purchase up to $10,000 (IRAs only)
Qualified Domestic Relations Order (QDRO) in divorce (employer plans only)

SECURE Act 2.0 added several new exceptions, including $1,000 for emergency personal expenses, $10,000 (or 50% of the account) for domestic abuse survivors, terminal illness distributions with no dollar cap, and up to $22,000 for federally declared disasters — with most new exceptions allowing three-year repayment.

Note: The 10% penalty is waived for 457(b) governmental plan distributions upon separation from service at any age — one of the most valuable features of those plans.

Roth Conversions

A Roth conversion moves assets from a pre-tax account (traditional IRA, SEP, SIMPLE, or employer plan) into a Roth IRA. The converted amount is added to ordinary income in the year of conversion and taxed accordingly. There is no 10% early withdrawal penalty on a properly executed conversion, even if you are under 59½.

Once converted, the money is subject to two separate five-year clocks. The first governs when converted principal can be withdrawn penalty-free if you are under 59½ (five years from January 1 of the conversion year). The second governs when earnings can be withdrawn tax-free (five years from January 1 of the year the Roth was first established, combined with the age-59½ or other qualifying condition).

Roth conversions are irrevocable — since the Tax Cuts and Jobs Act of 2017, "recharacterization" (undoing a conversion) is no longer allowed. The IRS also applies the pro-rata rule: if you hold any pre-tax IRA balances, you cannot convert only after-tax amounts; each conversion is treated as a proportional blend of all your IRA assets.

The strategic case for Roth conversions is strongest when current tax rates are low relative to expected future rates, when the taxpayer has sufficient outside cash to pay the conversion tax bill (avoiding any withholding that would trigger a penalty), and when eliminating future RMDs is a priority.