15 IRA Rules You Should Know

Get answers to questions about traditional and Roth IRAs.

Laura Adams, MBA
Episode #205

This year is the perfect time to get serious about funding your retirement. It’s smart to use retirement accounts to grow your nest egg because the tax advantages they offer make your money go further. Some people might shy away from using retirement accounts because the rules can seem confusing—in fact, I get more questions about retirement accounts than any other personal finance topic. That’s why I devoted chapter 7 of my new book, Money Girl’s Smart Moves to Grow Rich, to everything you need to know about the different types of retirement accounts, no matter if you’re employed, self-employed, or unemployed. In this article I’ll cover 15 major rules that you should know about Individual Retirement Arrangements or IRAs.

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IRA Rule #1: Contributions to a Traditional IRA are Tax-deductible.

In general, you don’t have to pay taxes on contributions you make to a traditional IRA. The tax on both your contributions and the growth in the account is deferred until you make withdrawals at some future date.

IRA Rule #2: Contributions to a Roth IRA are not Tax-deductible.

This is the opposite of a traditional IRA because you have to pay tax upfront on the money you contribute to a Roth IRA. However, both your contributions and earnings can be withdrawn completely tax free when you retire. To find out whether a traditional or a Roth IRA is best for you, read my previous article, Should I Have a Traditional or Roth IRA?.

IRA Rule #3: You Must Have Earned Income to Contribute to an IRA.

If you have taxable compensation during the year—such as salaries, wages, tips, bonuses, commissions, and self-employment income—you’re eligible to contribute to a traditional or a Roth IRA. For 2010 and 2011, you can contribute an amount equal to your taxable compensation up to $5,000 or up to $6,000 if you’re age 50 or older.

IRA Rule #4: Minors Can Have an IRA.

Anyone with earned income can contribute to an IRA, no matter your age. So children can start saving for retirement as soon as they get their first part-time job. They can contribute as much as they earn, up to the maximum limit of $5,000 for 2010 and 2011.

IRA Rule #5: Spouses Without Earned Income Can Have an IRA.

If you’re married and file a joint tax return and just one of you has compensation, both of you can have an IRA.

If you’re married and file a joint tax return and just one of you has income, both of you can have an IRA. That helps an unemployed or stay-at-home spouse save for retirement.

IRA Rule #6: IRAs Can’t be Owned Jointly.

All retirement accounts must be owned by individuals, even if you’re married. And you’re not allowed to mix funds either, by rolling over one person’s retirement money into another person’s retirement account.

IRA Rule #7: You Can’t Fund an IRA for Someone Else.

Each owner of a retirement account must qualify to open up and contribute to an IRA. So a parent can’t fund a retirement account on behalf of a child, for instance.

IRA Rule #8: You Can’t Contribute to a Roth IRA if Your Income is Too High.

The amount you can contribute to a Roth IRA is reduced or eliminated when your income reaches certain limits. Single taxpayers can’t have modified adjusted gross income that’s $120,000 or more. The Roth cutoff for married people who file a joint tax return is $177,000.

IRA Rule #9: Your Roth IRA Can Sit Idle.

If you contributed to a Roth IRA in the past but now make too much money to be eligible, congratulations! But don’t let that stop you from saving for retirement—you can open up and contribute money to a traditional IRA instead. If your income falls below the Roth cutoff in the future, you can start making contributions again to the same Roth IRA.

IRA Rule #10: There’s No Minimum IRA Contribution Requirement.

You choose whether you want to contribute to an IRA each year or not. If you don’t make a contribution traditional and Roth IRAs stay open indefinitely.

IRA Rule #11: You Can Withdraw Contributions from a Roth IRA Penalty-free.

Since you pay tax upfront on Roth IRA contributions, you can withdraw them penalty-free. Just make sure that you don’t withdraw earnings on the account because that would be considered an early withdrawal, subject to income tax plus a 10% early withdrawal penalty.

IRA Rule #12: You Can Have More than One IRA.

You can open up and contribute to as many traditional and Roth IRAs as you like. However, your total contributions to all of them can’t exceed your annual allowable limit (which is $5,000 for most people under 50). You can make any combination of contributions in the same year, such as $1,000 to a Roth IRA and $4,000 to a traditional IRA.

IRA Rule #13: You Can Contribute to Both an IRA and a Workplace Retirement Account.

You can contribute to a retirement plan at work—like a 401(k), 403(b), or 457—and still max out contributions to an IRA in the same year. However, if you or your spouse has a workplace retirement plan, the tax deduction for your IRA contributions may be reduced or eliminated, depending on your income.

IRA Rule #14: Current IRA Losses Are Not Tax-deductible.

In a taxable brokerage account, investment losses can be used to offset investment gains each year—but that’s not the case for an IRA.

IRA Rule #15: You Have Extra Time to Make IRA Contributions.

You have until April following the tax year to make IRA contributions. For example, if you want to fund your IRA for 2010, you have until April 18th of 2011 to do it.

So, what are you waiting for? Having an IRA gives you complete control over the account and the flexibility to choose from a wide range of investments. It’s never too late to start putting money away for a secure and happy retirement.

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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