Understanding IRAs

Updated 12/12/25

An individual retirement arrangement (IRA) is a personal savings plan that offers specific tax benefits. IRAs are one of the most powerful retirement savings tools available to you. Even if you're contributing to a 401(k) or other plan at work, you might also consider investing in an IRA.

Definitions:

Here are some helpful definitions that make things easier to understand, as you learn more about IRAs.

• Contribution: A contribution is money you add to your IRA for a given tax year, up to the annual IRS dollar limit and subject to income and age‑related eligibility rules for that type of IRA. Contributions can be deductible (pre‑tax) in a traditional IRA or made with after‑tax dollars in a Roth IRA, which affects how withdrawals are taxed later.
• Withdrawal: A withdrawal is any amount you take out of an IRA, regardless of whether it is voluntary or required. In everyday usage, “withdrawal” often refers to non‑required, discretionary amounts you choose to take out, which may be taxable and could be subject to early‑distribution penalties if you are under age 59 1/2 and no exception applies.
• Distribution: A distribution is the formal IRS term for any taxable or reportable payment from an IRA to you or on your behalf. Required minimum distributions (RMDs) from traditional IRAs are a specific type of distribution that must start once you reach the applicable RMD age, while Roth IRAs generally have no lifetime RMDs for the original owner.
• MAGI: MAGI stands for modified adjusted gross income and is your adjusted gross income (AGI) after adding back certain items the tax code excludes or deducts, such as some tax‑exempt interest or foreign earned income. For IRAs, MAGI is used to determine whether you can contribute directly to a Roth IRA and whether your traditional IRA contribution is deductible in 2026.
• Tax deduction: A tax deduction is an amount you subtract from your income on your tax return, reducing the income that is subject to tax. For traditional IRAs in 2026, you may be able to take a deduction for part or all of your contribution, depending on your MAGI, filing status, and whether you (or a spouse) are covered by a workplace retirement plan.

What types of IRAs are available?

The two major types of IRAs are traditional IRAs and Roth IRAs. Both allow you to contribute as much as $7,500 in 2026 (up from $7,000 in 2025). You must have at least as much taxable compensation as the amount of your IRA contribution. If you are married filing jointly, your spouse can also contribute to an IRA, even if he or she has little or no taxable compensation, as long as your combined compensation is at least equal to your total contributions. The law also allows taxpayers age 50 and older to make additional "catch-up" contributions. This additional catch-up amount is increased to $1,100 for 2026 (total of $8,600), up from $1,000 for 2025.

Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both give you a wide range of investment choices. However, there are important differences between these two types of IRAs. You must understand these differences before you can choose the type of IRA that's best for you.

Note: Special rules apply to certain reservists and national guardsmen called to active duty after September 11, 2001.

Traditional IRAs

A traditional IRA is a retirement plan that is tax deferred, meaning you won't pay taxes until you take withdrawals or distributions. Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have qualifying compensation. You can contribute the maximum allowed each year ($7,500 for 2026) as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned.

MAGI (Modified Adjusted Gross Income) Phase-Out Ranges for 2026

Filing Status & Coverage	MAGI Phase-Out Range
Single/Head of Household	$81,000 - $91,000
Married Filing Jointly (you covered)	$129,000 - $149,000
Married Filing Jointly (spouse covered)	$242,000 - $252,000
Married Filing Separate (covered)	$0 - $10,000

 

Why these matter:

• If your income is below these ranges, you can deduct 100% of your Traditional IRA contributions.
• If you're within a range, your deduction is partially phased
• If your MAGI is above, contributions are not deductible.

What Happens when you Start Taking Money from your Traditional IRA?

Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10% early withdrawal penalty if you're under age 59 1/2, unless you meet one of the exceptions. You must aggregate all of your traditional IRAs — other than inherited IRAs — when calculating the tax consequences of a distribution.

 

When Do You Have to Start Taking Distributions from a Traditional IRA?

For 2026, you must begin taking the required minimum distribution (RMD) from a traditional IRA by April 1 of the year following your 73rd birthday.  After that, you must take a distribution by December 31 every calendar year until you die or your funds are exhausted. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you're required to in any year. However, if you withdraw less, you'll be hit with a 25% penalty of the amount not withdrawn, or 10% if the RMD is not corrected within two years.

Roth IRAs

Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation in 2026 is at least $7,500, you may be able to contribute the full amount. But it gets more complicated.

Your ability to contribute to a Roth IRA depends on your MAGI and your income tax filing status:

• If your filing status is single or head of household, and your MAGI for 2026 is $153,000 or less, you can make a full contribution to your Roth IRA. Your Roth IRA contribution is reduced if your MAGI is more than $153,000 and less than $168,000, and you can't contribute to a Roth IRA at all if your MAGI is $168,000 or more.
• If your filing status is married filing jointly or qualifying widow(er), and your MAGI for 2026 is $242,000 or less, you can make a full contribution to your Roth IRA. Your Roth IRA contribution is reduced if your MAGI is more than $242,000 and less than $252,000, and you can't contribute to a Roth IRA at all if your MAGI is $252,000 or more.
• If your filing status is married filing separately, your Roth IRA contribution is reduced if your MAGI is less than $10,000, and you can't contribute to a Roth IRA at all if your MAGI is $10,000 or more.

Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely income tax free, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

• You have reached age 59 1/2 by the time of the withdrawal
• The withdrawal is made because of disability
• The withdrawal is made to pay first-time home-buyer expenses ($10,000 lifetime limit)
• The withdrawal is made by your beneficiary or estate after your death

Qualified distributions will also avoid the 10% early withdrawal penalty. This ability to withdraw your funds with no taxes or penalties is a key strength of the Roth IRA. And remember, even non qualified distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made. You must aggregate all of your Roth IRAs — other than inherited Roth IRAs — when calculating the tax consequences of a distribution.

When Must You Start Taking Distributions from a Roth IRA?

There are no required minimum distributions at any time during your life with a Roth IRA. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. Also, as long as you have taxable compensation and qualify, you can also keep contributing to a Roth IRA.

Choose the right IRA for you

Assuming you qualify to use both, which type of IRA is best for you? Sometimes the choice is easy. The Roth IRA will probably be a more effective tool if you don't qualify for tax-deductible contributions to a traditional IRA. However, if you can deduct your traditional IRA contributions, the choice is more difficult. The Roth IRA may very well make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries. But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you're still working (and probably in a higher tax bracket than you'll be in after you retire). A financial professional or tax advisor can help you pick the right type of IRA for you.

Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot be more than $7,500 for 2026 ($8,600 if you're age 50 or older).

Know your options for transferring your funds

You can move funds from an IRA to the same type of IRA with a different institution (e.g., traditional to traditional, Roth to Roth). No taxes or penalty will be imposed if you arrange for the old IRA trustee to transfer your funds directly to the new IRA trustee. The other option is to have your funds distributed to you first and then roll them over to the new IRA trustee yourself. You'll still avoid taxes and the penalty as long as you complete the rollover within 60 days from the date you receive the funds.

You may also be able to convert funds from a traditional IRA to a Roth IRA. This decision is complicated, however, so be sure to consult a tax advisor. He or she can help you weigh the benefits of shifting funds against the tax consequences and other drawbacks.

Note: The IRS has the authority to waive the 60-day rule for rollovers under certain limited circumstances, such as proven hardship.

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