IRA Rules: Contributions, Rollovers, Conversions, and Withdrawals
Individual retirement accounts have rules on who can contribute, how money moves between accounts, and when it can come out without penalties. Here are the rules that matter most, and the mistakes that cost people money.
An individual retirement account (IRA) is a tax-advantaged retirement account you open yourself, separate from an employer plan. The two main types are traditional and Roth. IRAs are flexible, but the rules on contributions, rollovers, and withdrawals are detailed, and mistakes can cause taxes and penalties.
Annual contribution limits and income thresholds change periodically. Check IRS guidance for current figures.
The short version
- You generally need taxable compensation, such as wages or self-employment income, to contribute. A working spouse can fund an IRA for a non-working spouse.
- Traditional IRA contributions may be deductible; deductibility can phase out if you or your spouse have a workplace plan and income is above certain levels.
- Roth IRA contributions aren't deductible, and the ability to contribute phases out at higher incomes.
- Contributions for a tax year can generally be made up to the tax filing deadline for that year, not including extensions.
- Rollovers between IRAs have a 60-day rule and a once-per-12-months limit; direct transfers avoid both.
- Withdrawals before 59½ generally face a 10% additional tax on taxable amounts, with exceptions.
Traditional vs. Roth IRA
| Traditional IRA | Roth IRA | |
|---|---|---|
| Contributions | May be deductible | Not deductible |
| Income limits | None to contribute; deduction may phase out | Contribution eligibility phases out |
| Growth | Tax-deferred | Tax-free if requirements met |
| Withdrawals | Taxed as ordinary income | Contributions can come out anytime tax- and penalty-free; earnings tax-free if qualified |
| Required minimum distributions | Yes, starting at RMD age | Not during the owner's lifetime |
See traditional vs. Roth for how to think about the choice.
Moving money between accounts
- Trustee-to-trustee transfer. IRA to IRA, money never touches you. No limit on how often.
- Direct rollover. Employer plan to IRA, paid directly. No mandatory withholding.
- Indirect (60-day) rollover. You receive the money and must deposit it within 60 days.
- Roth conversion. Moving pre-tax money to a Roth; the converted amount is taxable.
Key rules:
- The 60-day rule: for an indirect rollover, you must deposit the funds in an eligible account within 60 days, or the amount is generally treated as a taxable distribution.
- Once per 12 months: you can do only one indirect IRA-to-IRA rollover in any 12-month period, across all your IRAs. Direct transfers and Roth conversions don't count toward this limit.
- Withholding on plan distributions: indirect rollovers from employer plans generally have 20% withheld, which you'd have to make up from other funds to roll over the full amount. See direct vs. indirect rollovers.
Roth conversions and the "backdoor"
You can convert traditional IRA money to a Roth IRA regardless of income. The converted pre-tax amount is taxable in the year of conversion. See Roth conversions: the basic math.
People above Roth income limits sometimes make a non-deductible traditional IRA contribution and then convert it, often called a backdoor Roth. If you have other pre-tax IRA balances, the pro-rata rule means part of the conversion is taxable based on the ratio of pre-tax to after-tax money across all your traditional, SEP, and SIMPLE IRAs. Get tax advice before doing this.
Withdrawals
- Before 59½: taxable amounts generally owe income tax plus a 10% additional tax, unless an exception applies. Some exceptions apply to IRAs but not employer plans, and vice versa. See early withdrawal penalties and exceptions.
- Roth IRAs: contributions can be withdrawn at any time without tax or penalty. Earnings are tax-free in a qualified distribution, which generally requires age 59½ (or another qualifying event) and that a Roth IRA has been open for at least five years.
- RMDs: traditional IRAs require minimum distributions starting at RMD age; see required minimum distributions.
Common mistakes
- Contributing without enough earned income.
- Contributing to a Roth with income above the limit; excess contributions face a yearly excise tax until corrected.
- Doing two indirect IRA rollovers within 12 months.
- Missing the 60-day deadline.
- Ignoring the pro-rata rule on backdoor Roth conversions.
- Forgetting to name beneficiaries, or not updating them after life changes.
The takeaway
IRAs give individuals a flexible way to save with tax advantages, but eligibility, rollovers, and withdrawals follow specific rules. Use direct transfers whenever possible, check income limits before contributing, and get tax advice for conversions and early withdrawals.
Sources
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