Understanding Traditional IRA Rules

There are a number of IRA rules that must be followed when dealing with an Individual Retirement Account. Traditional IRA rules apply to contributions, withdrawals, and more. So, it's important that they're handled appropriately.


An IRA, Individual Retirement Arrangement or Individual Retirement Account, is a retirement savings plan that you can contribute to as long as you have taxable earnings during the year. Taxable earnings, include wages, salaries, tips, bonuses, fees, taxable alimony, commissions, and separate maintenance payments.

There are certain IRA rules regarding how much can be contributed to an IRA, in what circumstances can money be withdrawn from an IRA, and the amount that must be withdrawn after a certain period.

When you put money into a traditional IRA, your contributions may be tax-deductible under certain circumstances. Whether you can deduct your contributions depends on your tax filing status, income, and eligibility to particulate in your employer’s retirement plan (even a self-employed retirement).

IRA Eligibility

To be able to deduct the maximum contribution amount, there are certain income limitations for individuals and couples whom have an active-participant status in an employer sponsored retirement plan. If you contribute to or qualify for an employer sponsored retirement plan, you’re considered to have an active-participant status.

If you file single or head of household, you can take the full IRA deduction if your adjusted gross income is less than $63,000. Between $63,000 and $73,000, you’re able to take a partial deduction. However, if you make more than $73,000, you’re not able to deduct any traditional IRA contributions.

If you file married filing jointly and you are an active participant, your adjusted gross income limit is $101,000. You can take a partial deduction if your combined income is between $101,000 and $121,000, but no deduction if your income is higher than $121,000. If you are not an active participant, but your spouse is, the income limit is $189,000 or less for the full deduction and $189,000 to $199,000 for a partial deduction. No deduction is allowed if your combined income is greater than $199,000.

Finally, with a married filing separately status, your adjusted gross income limit for a partial deduction is $10,000 when either you or your spouse is an active participant.

If you are not an active participant (and neither is your spouse if you’re married), there is no income limit to be able to take the full deduction for traditional IRA contributions.

IRA Contribution Limits

The IRS specifies a maximum deductible contribution IRA limit. In 2018, you can contribute up to $5,500 if you’re less 50 years old. Couples younger than 50 can contribute up to $11,000. Individuals approaching or over 50 can contribute up to $6,500 and couples can contribute as much as $13,000.

You can contribute to your IRA beyond the limits stated above, but those contributions will not be tax-deductible. The earnings on those distributions will continue to grow tax-deferred and you’ll pay taxes on the earnings when you withdraw them.

Traditional IRA Withdrawals

You can withdraw the money after age 59 1/2 without penalty, but the amount you withdraw is subject to income tax.

You may receive a penalty for early withdrawals with certain exceptions:

  • Your medical expenses are more than 7.5% of your adjusted gross income
  • You’ve received federal unemployment benefits for more than 12 consecutive weeks and you plan to use your withdrawal to pay for health insurance.
  • You plan to use the IRA withdrawal for a first time home purchase. There is a $10,000 lifetime withdrawal limit and you must not have owned a home for the past two years.
  • Rule 72(t) allows for withdrawal as early as age 55, but rules require equally substantial
    distributions for a minimum of five years.
  • You plan to pay for higher education expenses for you or a family member.
  • You become disabled.
  • The IRA owner dies.

All withdrawals are subject to taxation.

Starting April 1 the year you turn 70 1/2, you must take the required minimum distribution (RMD) each year. Your required distribution is based on your age and the value of your IRA. You can skip your RMD in 2009 as part of the Worker, Retiree, and Employer Recovery Act of 2008. In 2010, RMDs will resume.

It’s important not to confuse traditional IRA rules with that of Roth IRA rules. They differ in deductibility and taxation upon withdrawal. Deciding which is more suitable for you can be determined by evaluating your unique situation and goals.