IRAs, Distributions, and Rollovers

Traditional and Roth IRA Foundations

Individual Retirement Accounts allow you to save for retirement using tax-advantaged structures. You can contribute to an IRA if you have eligible compensation; if you file a joint return with a spouse who has eligible compensation, you may also be able to contribute to an IRA in your own name even if you have no eligible compensation. The two primary individual arrangements are Traditional IRAs and Roth IRAs, each offering distinctly different tax incentives.

A Traditional IRA provides tax-deferred growth, but its contributions may be deductible or nondeductible. Your contributions to a Traditional IRA may be fully deductible, partially deductible, or nondeductible. This deductibility depends on your income, your tax filing status, and whether you or your spouse is covered by an employer retirement plan. Investment earnings inside a Traditional IRA accumulate on a tax-deferred basis, meaning you pay no income tax on gains while the assets remain in the account. When you take distributions, amounts funded entirely with deductible contributions are taxed as ordinary income in the year received. If you made nondeductible contributions, you have an after-tax basis; each distribution generally includes a tax-free share calculated using the basis and the combined value and distributions of your traditional IRAs.

A Roth IRA operates on an after-tax model. Contributions to a Roth IRA are funded strictly with after-tax dollars and are never federal income tax-deductible. Direct contributions are also subject to eligibility limits, as high-income earners may be restricted or entirely prohibited from contributing directly based on statutory income thresholds. Because you fund a Roth IRA with after-tax money, you can withdraw your original contributions at any time without paying income tax or an early withdrawal penalty.

Earnings inside a Roth IRA accumulate tax-deferred and can be withdrawn completely tax-free if the withdrawal meets the statutory criteria for a qualified distribution. A Roth IRA distribution is qualified if the five-tax-year requirement is met and it is made after you reach age 59 1/2, because you are disabled, to a beneficiary or your estate after your death, or for a qualified first-time home purchase subject to a lifetime limit. If a Roth IRA distribution includes earnings and does not meet both the five-tax-year requirement and a qualifying event, those earnings are generally taxable as ordinary income; an additional 10 percent early distribution tax may also apply if you are under age 59 1/2 and no exception applies. If you withdraw the taxable portion of a Roth conversion within that conversion's separate five-tax-year period, a 10 percent early distribution tax may apply unless you meet an exception.