Traditional IRAs: Eligibility Requirements

  1. Traditional IRAs: Introduction
  2. Traditional IRAs: Eligibility Requirements
  3. Traditional IRAs: Contributions
  4. Traditional IRAs: Distributions
  5. Traditional IRAs: Conclusion

Almost anyone may establish a traditional IRA or make a regular contribution to one: All you need to have is eligible compensation ( e.g. wages, salary, and self-employment income which is earned by sole proprietors and partners) for the year – and to have not reached 70½ by the end of the year.   

Note that these restrictions apply to regular, annual IRA contributions. There are no age limitations or income requirements for establishing a traditional IRA for the purpose of receiving assets transferred from another traditional, SEP or SIMPLE IRA – or for the purpose of a rollover from a qualified plan, 403(b), governmental 457(b) plan or another traditional IRA.

IRA-Eligible Compensation

For an individual working for an employer, the kinds of compensation that are eligible to fund a traditional IRA include wages, salaries, commissions, bonuses and other amounts paid to the individual for services performed for his or her employer. At a high level, eligible compensation is any amount shown in Box 1 of the individual's Form W-2.

For a self-employed individual or partner in a partnership, eligible compensation is the net earnings earned from the individual's business minus any deduction allowed for contributions made to other retirement plans on the individual's behalf, further reduced by 50% of the individual's self-employment taxes.

Other compensation that is eligible for regular contributions to a traditional IRA includes taxable amounts received as a result of a divorce decree. (For more insight, see An Introduction to Ineligible IRA Contributions.)

Which Compensation Is Ineligible?

The following sources of income are examples of compensation that are not eligible to be used for contributing to a traditional IRA:

  • rental income or other profits from property
  • income from interest and dividends
  • pension or annuity income
  • deferred compensation
  • income from some partnerships
  • income or amounts that can be excluded from income

Establishing an IRA

A traditional IRA must be established with an institution that has received IRS approval to offer IRAs. These include banks, brokerage companies, federally insured credit unions, savings & loan associations and any other IRS-approved institution.

A traditional IRA can be established at any time. Contributions for a tax year, however, must be made by the IRA owner's tax-filing deadline, which is usually April 15 of the year following the tax year. The IRA must be opened in time to receive the IRA contribution. Tax filing extensions do not apply to IRA contributions.

There are two basic documents that must be given to the IRA owner when establishing an IRA:

  • The IRA Disclosure Statement. This statement explains the rules and regulations of the IRA in clear, nontechnical language. The IRA owner must be provided with the disclosure statement at least seven days before the IRA is established. Alternatively, the document may be supplied at the time the IRA is established, but the IRA owner must be given seven calendar days within which the IRA can be revoked.
  • The IRA Adoption Agreement and Plan Document. This is the contract between the IRA holder and the financial institution. The IRA plan document explains the provisions of the IRA, including the allowable investments, contribution limits, rules for deducting an IRA contribution, distribution rules and the rights of the IRA owner. The IRA is not considered "established" until the IRA owner signs the agreement.
Traditional IRAs: Contributions