Traditional IRA Rules

Key facts

  • If income guidelines are met, contributions to a Traditional IRA are tax-deferred, meaning taxes are only assessed upon withdrawals.
  • Individuals under 50 can contribute up to $6,000 per year and those 50 and older can contribute up to $7,000.
  • Distributions taken before the age of 59½ may be assessed an additional 10% penalty.
  • A required minimum distribution must be taken after the age of 70 ½.

Lawmakers understand the importance of retirement savings, so they have designed several programs to make putting money aside as easy as possible. Anyone with earned income can make contributions to Traditional IRA, and if certain guidelines are met, contributions are tax-deferred. A quick overview of Traditional IRA rules is all you need to get started on your path to saving for retirement.

Benefits of a Traditional IRA

Funds deposited into a Traditional IRA account can be tax-deferred if certain income guidelines are met, which can mean allowing larger upfront contributions to compound over time. Income taxes aren’t assessed until you take a distribution. For many, this could mean an overall lower tax liability, since income may decrease in retirement.

There may be other tax benefits to saving with a Traditional IRA as well. For example, the Retirement Savings Contributions Credit (Saver’s Credit) was designed to give extra incentives to low and moderate income savers.

IRA Income and Contribution Limits

There are two main qualifiers to determine whether you are eligible to contribute tax-deferred funds to a Traditional IRA. First, you must have earned income. Second, you must meet certain income limits that are reviewed by the IRS each year. The income limits are based on your modified adjusted gross income (MAGI), which is your adjusted gross income with some deductions added back in. The income limits vary, depending on whether you are covered by an employer retirement plan or not covered by an employer retirement plan.

For each tax year, the IRS permits you to contribute to your Traditional IRA during a 15-month window. You can contribute to your account from the first of the year through the tax filing deadline of the following year. For example, deposits intended for the 2019 tax year can be made between January 1, 2019, and the 2019 tax filing deadline around April 15 of 2020.

Taking Distributions from Traditional IRAs

The rules around Traditional IRA withdrawals can appear complex at first glance, but there are just a few important points to remember. First, you can withdraw from your IRA account any time. Any distributions you take will be subject to applicable income taxes. Second, no penalty applies to distributions if you are 59 ½ or older. There may be a 10% tax penalty assessed if you withdraw from the account before you are 59 ½. Some additional exceptions exist that allow you to make an early withdrawal without the penalty.

Finally, after the age of 70 ½, you must take required minimum distributions (RMD) in order to avoid tax penalties. Note that these penalties are significant, up to 50% of the funds that were not taken as distributions. Fortunately, the IRS has a number of helpful resources to assist you in calculating the amount you must withdraw to avoid this penalty.


Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.