Learn how traditional IRAs work — and why they still make sense for many investors.
We encourage you to consult your tax advisor or financial professional to discuss your financial goals, eligibility and individual tax situation. For additional information, you can also refer to IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), at irs.gov.
You (or your spouse, if filing a joint return) can contribute if you have taxable compensation (a salaried job, investments and other sources). Before January 1, 2020, you couldn't contribute if you were age 70½ or older. The SECURE Act repealed the age restriction.
For 2020, the IRA annual contribution limit is $6,000 or 100% of your compensation, whichever is less.
For 2020, individuals age 50 and older may contribute up to an additional $1,000 to their IRAs.
Contributions for the current tax year must be made by April 15 of the following year.
Depending on your tax-filing status, modified adjusted gross income (MAGI) limits and retirement plan participation, you may be eligible to deduct your full contribution, part of it or none of it. Your MAGI is calculated by subtracting certain expenses and allowable adjustments from your gross income. To determine your MAGI, contact your tax advisor.
Use the table below to determine who can take a deduction.
Single (IRA owner is covered by a retirement plan at work)
$65,000 or less
$75,000 or more
Joint (IRA owner is covered by a plan at work)
$104,000 or less
$124,000 or more
Joint (IRA owner’s spouse, not IRA owner, is covered by a plan at work)
$196,000 or less
$206,000 or more
Nonparticipants in a Retirement Plan
IRA investors who are not covered by a retirement plan at work and who are single or who have a spouse not covered by a plan at work can contribute up to $6,000 in 2020 (compensation must equal or exceed the contribution) and can deduct the full contribution amount. There is no maximum MAGI limitation.
Nonrefundable Tax Credits
Eligible taxpayers can claim a nonrefundable tax credit for contributions to their IRAs. The maximum credit allowed is 50% of total annual contributions up to $2,000, so long as household income doesn't exceed certain limits.
For 2020, joint filers with a MAGI of $65,000 or less and single filers with a MAGI of $32,500 or less qualify.
Unemployed spouses (or spouses not covered by a retirement plan at work) can make tax-deductible contributions to an IRA, even if the other spouse is covered by a retirement plan at work.
Up to $6,000 in 2020 (spouses age 50 and older may contribute an additional $1,000) may be contributed as long as the couple files a joint tax return with compensation equal to or exceeding the IRA contributions for the year.
If the employed spouse is covered by a retirement plan, the unemployed spouse can make tax-deductible contributions to an IRA if the couple’s combined MAGI is less than $196,000 for 2020. The deduction is phased out if the couple’s combined MAGI is between $196,000 and $206,000.
Penalty-Free Early Withdrawals
You may withdraw money penalty-free before age 59½ for any of the following reasons:
- A first-home purchase, up to $10,000 (lifetime maximum)
- Qualified higher education expenses for yourself, a spouse, child or grandchild
- Contributions made with after-tax money
- Certain periodic payments, medical expenses and health insurance premiums
- If assessed with a levy by the IRS
- Upon disability or at death
Effective for distributions made after December 31, 2019, certain distributions related to the birth or adoption of a child are exempt from the 10% early withdrawal penalty.
- Qualified withdrawals are limited to $5000, in aggregate across an individual's accounts per birth or adoption
- The withdrawal must be made within one year after the birth or adoption date
- Subject to certain requirements including timing, these distributions may be repaid to a plan or IRA; though interested individuals should consider waiting for future IRS guidance that explain the exact timing rules for the repayment.
These exceptions are often referred to as 72(t) provisions because they fall under Internal Revenue Code Section 72(t).
All withdrawals are taxed as ordinary income.
- Contributory IRA assets are protected from creditors up to $1 million. Contributory assets above $1 million are subject to state law regarding creditor protection.
- Rollover IRA assets that came from employer-sponsored retirement plans — 401(k), 403(b), 457, profit sharing, money purchase, SIMPLE and SEP IRAs — enjoy unlimited protection regardless of the amount and are not subject to state law regarding creditor protection.
Setup and Annual Fees
American Funds traditional IRA fees include:
- A one-time setup charge of $10 per Social Security number
- An annual custodian fee of $10 per Social Security number
Note: The setup charge and annual fee discussed above also cover SEP accounts with the same Social Security number. A separate $10 setup charge and annual custodian fee apply to the following accounts:
- Roth IRAs
- SIMPLE IRAs
Converting to a Roth IRA
- Assets in a traditional IRA may be converted to a Roth IRA regardless of your MAGI or tax filing status.
- Required minimum distributions (RMDs) from the traditional IRA are not considered part of the MAGI. Investors age 72 and over who would be subject to RMDs from their traditional IRAs may be able to convert to a Roth and avoid future distributions. Investors should consult with their financial professionals to determine the best option for their situations.
- The taxable portion of the converted amount will be treated as taxable income.
- Future contributions can be made to the new Roth IRA.
- A conversion must be initiated by December 31 of a given year to be considered a conversion for that taxable period.
Converting to a Roth IRA is a taxable event, and the rules and tax calculations can be complicated. State income-tax rules for conversions may differ from federal rules. We encourage you to discuss conversion options with your tax advisor or financial professional.
Share Classes for Rollover IRAs
Rollovers from retirement plans must be invested in Class A shares (generally with a front-end sales charge) or in Class C or F shares, according to the purchase policies described in each mutual fund’s prospectus.
Each investor's situation is unique, so we encourage you to consult your tax advisor or financial professional to discuss your situation. For additional information about traditional and Roth IRAs, you can also refer to IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), at irs.gov.