Conventional IRA Rules

Contribution Eligibility

• You cannot contribute to an IRA unless you have earned taxable compensation, paid to you by either an employer or your own business. If you file a joint income tax return with your spouse, you may both contribute to an IRA, even if only one of you has taxable compensation. Income from investments does not qualify as taxable compensation.
  
  

Contribution Limits

• The amount you can put into your IRA is not fixed, and is subject to change by the IRS. However, regardless of the IRS limit you cannot put more into your IRA than you receive as taxable compensation. For example, if the IRA contribution limit is $5,000 but you only earn $4,000, the IRS limits your contribution to $4,000. However, if your spouse's compensation less the amount of her own IRA contribution exceeds this $5,000 limit, you can contribute the full $5,000 for yourself as well.
  
  

Deductibility Limits

• A key advantage of a traditional IRA is that you may be able to take a tax deduction for the amount of your contribution. If your employer offers a retirement plan, the IRS may restrict the amount of your tax deduction based on your compensation. Your deduction phases out once your income reaches a certain threshold, and could vanish altogether at higher income levels. IRS Publication 590 provides the corresponding income levels for reduced deductibility based on tax filing status.
  
  

Premature Withdrawals

• You cannot take money out of your traditional IRA before retirement age without penalty. The cutoff age for determining a premature withdrawal is age 59-1/2, regardless of when you actually retire. You must forfeit 10 percent of your distribution if you withdraw the money before age 59-1/2.
  
  

Required Withdrawals

• Just as you cannot take IRA distributions without penalty before 59-1/2, you cannot leave money in your IRA past age 70-1/2 without penalty. Taking what is known as an "insufficient distribution," or neglecting to take a required minimum distribution altogether, results in a penalty much more severe than the premature withdrawal penalty. The penalty in this case jumps to 50 percent.
  
  

Forbidden Transactions

• While you can conduct many kinds of transactions in a traditional IRA, you do not have unlimited options. The IRS specifies certain transactions that can disqualify your IRA right out of existence, resulting in a tax bill for your entire IRA. You cannot borrow against your IRA, use it as security for a loan or sell property to it. You also cannot be paid an excessive amount to manage it, or buy property for your personal use with IRA funds. All of these actions result in the loss of your IRA status, meaning you must include the amount of your IRA in your earned income for the year.