Whether or not you can open an individual retirement account, or IRA, depends on a number of factors. Age is just one of them. Here's a quick look at the main rules governing the two types of IRAs, traditional and Roth.
IRA Rules: Your Age
Let's start with age. For Roth IRAs, it's simple: There are no age restrictions.
For traditional IRAs, there are no age restrictions if you are establishing a new IRA to which you will transfer or roll assets from another IRA or eligible retirement plan, such as a qualified plan or a 403(b) or 457(b) account.
However, if you are establishing a new traditional IRA in order to make regular IRA participant contributions, you are allowed to do so provided you do not reach age 70½ in the year you make that first contribution. The limit also stretches to whether you can add to a traditional IRA that you already own.
Here's an easy way to figure this out. For the year you want to contribute to a new or existing traditional IRA, if your 70th birthday occurs anytime from:
- January 1 to June 30: You will reach age 70½ by year-end,.As a result, you are not allowed to make an IRA participant contribution to a traditional IRA for that tax year.
- July 1 to December 31: You will not reach age 70½ by year-end. Therefore, you are allowed to make an IRA participant contribution to a traditional IRA for that tax year.
Additional IRA Rules
The amount you are allowed to contribute to either a traditional or a Roth IRA is currently $6,500 – $5,500 plus a "catch-up" contribution of $1,000 for anyone age 50 or over. For both types of IRAs you have to have earned income, or what the IRS calls "taxable compensation" in order to contribute. That includes wages and salaries, commissions, self-employment income, alimony and separate maintenance and nontaxable combat pay. What doesn't count: earnings and profits from property, interest and dividend income, pension or annuity income, deferred compensation, income from certain partnerships and "any amounts you exclude from income."
But the IRS may limit the amount of your contribution: If you earn less than $6,500, you can only contribute as much as you make. In the case of a Roth IRA, your tax filing status and a high income may also curtail your contribution. And in the case of a traditional IRA, if you or your spouse is covered by a retirement plan at work, you may not be allowed to deduct your contribution from your taxes. The IRS website spells out these rules in greater detail.
You have 15 months in which to make your participant contributions for any particular year – basically, from January 1 to April 15 of the following year – and the IRS allows you to put your money in a wide range of investments, including stocks, bonds, mutual funds, ETFs and more.
The Bottom Line
If you are not eligible to make a participant contribution to a traditional IRA, talk to your tax professional about making a contribution to a Roth IRA instead. He or she can help you determine if this alternative suits your financial profile.