Individual Retirement Accounts (IRAs) are tax-sheltered savings accounts that are provided by many commercial financial institutions. IRAs are governed by IRS Publication 590, which describes the various types of IRAs.

Unlike 401(k)s, IRAs are individual accounts that you open and control on your own. Like 401(k)s, the funds in the IRA grow tax-free or tax-deferred, depending on the type of account. IRAs also have eligibility restrictions based on income or employment status, limits on how much you can contribute each year and conditions on when you can take money out before a designated retirement age without penalty. You can roll over funds from a 401(k) into an IRA, and combine them with your own IRA contributions in the same account.

There are several types of IRAs, with different terms and conditions for each.

Traditional IRAs. Traditional IRAs are tax-deferred retirement accounts. Anyone with earned income from employment or self-employment can contribute to a traditional IRA. Contributions you make to a traditional IRA are tax-deductible, and the funds grow tax-deferred. But withdrawals are taxed as ordinary income when taken, except for those portions of the withdrawal corresponding to contributions that were not deducted. There are no income limits on opening a traditional IRA, but the amount you can contribute each year is capped by IRS regulation. In 2015 the contribution limits were $5,500 ($6,500 if you’re age 50 or over). You can contribute to a traditional IRA even if you have a 401(k) plan at work, but your IRA contributions may not be tax deductible in that case.

Traditional IRAs also have some age restrictions. You are allowed to contribute to a traditional IRA up to age 70 ½. Withdrawals from a traditional IRA at age 59 and under are subject to a 10% penalty, in addition to taxes. Withdrawals at age 59 ½ and above are taxed, but not subject to penalty. Withdrawals must be made starting at age 70 ½ ; if not, the IRS imposes a penalty equal to half of the funds that should have been taken.

Instead of taking distributions, you can make up to $100,000 of charitable contributions from your traditional IRA to satisfy the RMD requirement. If you don’t need the distributions to meet living expenses, this can be a alternative way to meet the requirement. Instead of distributions that raise your adjusted gross income, the charitable contributions may result in a tax deduction. Distributions must be made to qualified charities and be paid directly to the charity by the IRA trustee or custodian.  Total charitable distributions from all IRAs for an individual cannot exceed $100,000 in a year; for married couples, each individual can make up to $100,000 of QCDs.

Roth IRAs. Roth IRAs were introduced as part of the Taxpayer Relief Act of 1997. Contributions to a Roth IRA aren’t tax-deductible, but distributions are usually tax-free. Unlike a traditional IRA, there are income restrictions on opening and contributing to a Roth IRA. You can only contribute to a Roth IRA if your income is below a certain limit. The maximum contribution amount is set by IRS regulation. In 2015, the maximum was $5,500 or $6,500 if age 50 or over.

A Roth IRA is not subject to the same age restrictions as a traditional IRA. You can take out funds anytime starting at age 59 ½ without taxes or penalty as long as you’ve had the account for at least five years. You are not required to stop contributing to a Roth IRA at age 70 ½ , and you are not required to take distributions at any age.

Spousal IRAs. Typically you need to have earned income in order to qualify to open an IRA. But the spousal IRA rules allow a nonworking spouse to open a traditional or Roth IRA in their own name, and make contributions to it, as long as several conditions are met

  • the spouse must be legally married
  • the couple must file federal taxes as married filing jointly
  • the household must have earned income at least equal to the total amount contributed to all both spouses’ IRAs

The spousal IRA must be held in the nonworking spouse’s name and social security number. If the nonworking spouse has an IRA they opened previously while they were working, they can keep using that account for spousal IRA contributions. Likewise, if they later resume employment, they can continue making contributions to that account.

The same rules apply to spousal IRAs that apply to regular traditional or Roth IRAs in terms of age, income, and contribution restrictions. If your spouse has a 401(k) at work, your contributions to a spousal traditional IRA may not be tax deductible.

SEP IRAs. A Simplified Employee Pension (SEP) is an IRA-based account that your employer contributes to on your behalf. The employer contributes to the SEP on behalf of eligible employees and can take a tax deduction for those contributions. The employees can include the business owner, in the case of sole proprietorships and partnerships.

The SEP IRA is based on a traditional IRA. You create a traditional IRA with a financial institution and the employer makes contributions to it. Contributions can range between 0% to 25% of the employee’s salary; the percentage must be the same for all employees. Contributions are limited to 25% of an employee’s salary or $53,000 (in 2016), whichever is less. The contributions are not considered taxable income, but distributions from the account are taxable. Depending on the financial institution, the SEP IRA account may be a normal IRA account that the employer makes contributions to. The SEP IRA account is subject to the same rules as any traditional IRA, in terms of whether contributions are tax-deductible and when distributions are to be taken.

SIMPLE IRAs. A Savings Incentive Match Plan for Employees (SIMPLE) IRA is also a retirement account that an employer contributes to on behalf of its employees. The SIMPLE IRA allows eligible employees to have part of their pretax income contributed to the account. The funds in the account grow tax-deferred until distributions are taken.

The employer is required to make contributions to the account as well. These can be matching contributions, in which the employer matches contributions made by the employee up to a maximum of 3% of the employee’s compensation. Or they could be nonelective contributions, which are paid to each eligible employee regardless of whether the employee themselves contributed to the plan. If the employee makes contributions to the account, these are pretax deductions made from salary but are still subject to Social Security, Medicare, and unemployment taxes. Employee contributions to a SIMPLE IRA cannot exceed a certain limit, which was $12,500 in 2016, or $15,500 if age 50 or over. SIMPLE IRAs are subject to the same distribution rules as a traditional IRA.

Normally, withdrawals made from an IRA before age 59 ½ are subject to 10% penalty. The penalty is waived if the money is used for qualified higher education expenses, health insurance premiums while unemployed, a first-time home purchase, or distributions to help pay unreimbursed medical expenses above a certain amount. Also, you can take a series of substantially equal payments to avoid penalties. Qualified military reservists also get some special provisions allowing withdrawals.

For more information

For an overview of IRAs and their tax implications visit the IRS page.

For more detail about Roth IRAs, visit

Deciding between a traditional and Roth IRA? Visit Schwab’s Roth vs traditional IRA calculator.

Want to open a Roth IRA but your income is too high? Learn about the backdoor Roth IRA.