IRA Rules: 9 Things You Must Know

If you’re planning for retirement (or just trying to be a responsible adult), an Individual Retirement Account (IRA) is one of the best ways to build long-term financial security. Whether you’re stashing away cash in a Traditional IRA or opting for the tax-free perks of a Roth IRA, these accounts offer serious advantages—if you play by the rules.

And trust me, there are rules. Contribution limits, tax benefits, penalties, rollovers, required distributions—it can get a little overwhelming. But don’t worry! We’re going to break it all down in a way that actually makes sense. Ready? Let’s dive in.

1. Contribution Limits and Who Can Open an IRA

First things first—how much can you put into an IRA? Every year, the IRS sets limits on how much you can contribute. For 2024, that limit is $7,000 if you’re under 50 and $8,000 if you’re 50 or older.

But there’s a catch. If you earn too much, you might not be able to contribute to a Roth IRA—or deduct contributions to a Traditional IRA. This is where income limits come into play. If your income exceeds a certain threshold, the IRS starts phasing out your ability to contribute directly to a Roth IRA.

Traditional IRAs, on the other hand, don’t have income limits for contributions, but they do for deductible IRA contributions—meaning whether or not you can deduct your contributions from your taxable income depends on your earnings and whether you have a workplace retirement plan like a 401(k).

Bottom line? Make sure to check where your income falls before assuming you can max out your IRA contributions tax-free.

2. Traditional vs. Roth IRA: The Tax Question

Not all IRAs work the same way. The biggest difference between a Traditional IRA and a Roth IRA is how they handle taxes.

• Traditional IRA – Your contributions are often tax-deductible (depending on your income), and your money grows tax-deferred. But once you start withdrawing funds in retirement, those withdrawals are taxed as regular income.
• Roth IRA – You pay taxes upfront on your contributions, but your withdrawals in retirement are completely tax-free (as long as you follow the rules).

So, which is better? It depends. If you expect to be in a higher tax bracket later, a Roth IRA might be the smarter move because you’re locking in today’s tax rate. If you think you’ll be in a lower tax bracket in retirement, a Traditional IRA could save you money now.

3. Required Minimum Distributions (RMDs): You Can’t Keep It Forever

If you have a Traditional IRA, the IRS won’t let you just let that money sit there forever. Starting at age 73, you must start taking Required Minimum Distributions (RMDs)—essentially forced withdrawals that are taxed as income.

Roth IRAs? No RMDs. You can leave that money sitting there as long as you want, which is why they’re a great tool for estate planning.

Miss an RMD? Ouch. The IRS will slap you with a penalty that used to be 50% of the amount you should’ve withdrawn—though now it’s been reduced to 25% (or 10% if you fix it quickly). Still, not worth the risk.

4. Early Withdrawals: Penalties and Loopholes

Need to take money out of your IRA before age 59½? Expect to pay a 10% penalty on top of regular taxes. But (good news!) there are exceptions where you can avoid the penalty:

• Buying your first home (up to $10,000)
• Higher education expenses
• Medical expenses that exceed 7.5% of your AGI
• Birth or adoption expenses (up to $5,000)
• Disability withdrawals

Otherwise, your best bet? Leave that money alone and let it grow.

5. Rollovers and Transfers: Moving Your Money Smartly

Switching jobs? You might have a 401(k) that needs a new home. That’s where rollovers come in.

You can roll over funds from a 401(k) into an IRA—but be careful. If the money gets sent to you directly, you have 60 days to deposit it into your IRA, or the IRS will count it as an early withdrawal (and hit you with taxes and penalties). The smarter move? A direct rollover, where the funds go straight from one account to another without you touching them.

6. Roth Conversions: Pay Taxes Now, Save Later

Want to turn your Traditional IRA into a Roth IRA? That’s called a Roth conversion, and it can be a smart move—if done strategically.

Here’s the deal: when you convert, you’ll owe taxes on the amount transferred (since Traditional IRAs are tax-deferred). The goal is to convert when you’re in a lower tax bracket—so you pay less tax now and enjoy tax-free withdrawals later.

Just don’t convert too much at once, or you might bump yourself into a higher tax bracket.

7. What You CAN’T Invest In (Yes, There Are Rules)

IRAs give you a lot of flexibility in how you invest, but not everything is fair game. The IRS prohibits certain investments, including:

• Collectibles (art, antiques, rare coins)
• Life insurance policies
• Certain real estate transactions (like buying property you personally use)

Mess up here, and you could accidentally disqualify your entire IRA—meaning the IRS will treat it as a full withdrawal (with taxes and penalties). Not fun.

8. Inheriting an IRA: The SECURE Act Changed the Game

If you inherit an IRA, the rules are different than if you were the original owner. Thanks to the SECURE Act, most non-spouse beneficiaries now have to withdraw all the money within 10 years (instead of spreading it over their lifetime).

Spouses still have more options, including rolling it into their own IRA. But for everyone else? The IRS wants its tax dollars sooner rather than later.

9. IRA Protection From Creditors: Is Your Money Safe?

Good news—IRAs have some level of protection from creditors, especially in bankruptcy cases. Federal law protects up to $1.5 million in IRA funds if you file for bankruptcy. Some states offer even better protection, so check your state laws if this is a concern.

Conclusion: Know the Rules, Maximize the Benefits

IRAs are powerful retirement tools, but knowing the rules is key to avoiding costly mistakes. Whether you’re deciding between a Traditional or Roth IRA, rolling over an old 401(k), or figuring out how to dodge early withdrawal penalties, understanding these guidelines will help you make the most of your retirement savings.

If you’re unsure about any of this, consider talking to a financial advisor. A little planning now can mean a lot more money later—and that’s something your future self will definitely appreciate.