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.
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.
The following sources of income are examples of compensation that are not eligible to be used for contributing to a traditional IRA:
A traditional IRA must be established with an institution that has received IRS approval to offer IRAs. The best IRA custodians include banks, brokerage companies, federally insured credit unions, savings & loan associations and any other IRS-approved institution. Investopedia has curated a list of the best IRA brokers for all types of investors.
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: