2017 IRA Rules: Eligibility, Income, Contribution Limits and More

Quick Summary

  • A traditional IRA is a tax-advantaged savings account for retirement. In most cases, you can deduct traditional IRA contributions from that year’s tax return and postpone taxes until you withdraw that money in retirement.
  • The IRA contribution limit for 2017 is $5,500 per year or $6,500 if you’re age 50 or over.
  • If you participate in an employer-sponsored plan, such as a 401(k), you may not be able to deduct IRA contributions


IRA is short for Individual Retirement Account, which is a type of savings account for retirement. Almost everyone who is under age 70½, and has earned income or a spouse with earned income, is eligible to open and contribute to an IRA. When you open an IRA, your money can be invested in your choice of stocks, bonds, ETFs (exchange traded funds), mutual funds and other investments.

The advantage of an IRA versus other types of non-retirement investments or savings accounts is that IRAs offer certain tax advantages. There are two main types of IRAs and each carries different tax treatment.

  1. What’s the difference between a Traditional and Roth IRA? 
  2. Who is eligible for an IRA? 
  3. What are the IRA contribution limits? 
  4. How can IRAs be invested? 
  5. What are the IRA withdrawal rules?

What’s the Difference Between a Traditional and Roth IRA?

The two most common types of IRAs are Traditional IRAs and Roth IRAs. (Other types of IRAs such as SEP IRAs or SIMPLE IRAs are set up by an employer or by someone who is self-employed, so we won’t get into those here.)

With Traditional IRAs, most people can deduct their contributions from their taxes in the year they contribute that money. For example, if you contribute $5,000, you can deduct $5,000 from your income when you file your taxes. Once you withdraw funds in retirement, then you pay taxes on it at your then-current income tax rate, which will typically be a lower rate than when you were working.

With Roth IRAs, on the other hand, you don’t get a tax deduction in the year you invest the money. Instead, you’re able to withdraw the money tax-free when you retire.

Trying to decide which type of IRA is right for you? This article explains the differences between Traditional and Roth IRAs or you can try our calculator to figure out which is best for you.

This article focuses on Traditional IRAs, but you can find detailed information on Roth IRA rules.

Who is eligible for an IRA?

Assuming you will be younger than 70½ at the end of the year, are working or receive long-term disability benefits, then you are eligible to open and contribute to an IRA. If you do not have earned income (wages, salary, tips or self-employment) but your spouse does, you too can open and contribute to a spousal IRA. But in the year you reach age 70½, you’re no longer eligible to contribute to a traditional IRA, even if you continue working.

What Are the IRA Contribution Limits?

For tax year 2017, the contribution limit is $5,500, or $6,500 if you are age 50 or over. However, your contributions cannot exceed your earned income in that year. For instance, teenagers working a part-time job are eligible to open and contribute to an IRA. But if they earn less than $5,500 in that year, then they cannot contribute additional money from birthday or holiday gifts to their IRA.

You can contribute to both a traditional and a Roth IRA, but your total contributions cannot exceed $5,500 or $6,500 depending on your age (or your total earned income, whichever is lower). If you accidentally over-contribute to your IRA, you can withdraw your excess contributions. But until you withdraw that money, the IRS will charge you a six percent tax on the excess.

Funds rolled over from other retirement accounts, such as a 401(k) from a former employer, are not included in your contribution limit. This is called an IRA rollover. Other types of IRAs have higher contribution limits.

One of the benefits about funding an IRA is the flexible timing. For example, if you contribute to an IRA for the 2017 tax year, you can do so from January 1, 2017 until the tax deadline of April 17, 2018. But even if you file an extension, your IRA contribution must be made by the tax deadline. [If you contribute to an IRA between January 1 and April 15, your investment company may ask you which tax year that contribution is for.]

IRA Eligibility and Contribution Rules, Combined

The deductibility of your contributions depends on your income and whether you’re covered by a retirement plan at work.

If you (or your spouse) don’t have an employer-sponsored retirement plan, then you can deduct your entire annual IRA contribution. If you or your spouse do have a retirement savings plan at work, your deduction may be limited. Our calculator can help you figure out your limits.

You can use this chart to see whether you are eligible to make a tax-deductible contribution based on your income and filing status.

How Can IRAs Be Invested?

An IRA allows you to invest in virtually unlimited financial products including stocks, bonds, mutual funds, ETFs and lifecycle funds. Most brokerages have a “target date fund” or “lifecycle fund” options where you choose the year closest to when you plan to retire (for instance, 2045 or 2040). Early on, the fund would invest aggressively but as you approach retirement, the investment choices would gradually become more conservative based on your expected year of retirement. This can be a good “set it and forget it” option for people who don’t want to actively manage their retirement investments. For example, Fidelity offers 33 “Freedom” funds that have low costs and automatically rebalance. Any investment your bank or brokerage company offers is fair game for your IRA. However, you cannot invest IRA funds in life insurance or collectibles such as artwork, cars and jewelry. That said, you are permitted to invest in certain kinds of gold coins using IRA funds.

As you’re choosing investments, opt for low fees and investment choices you can understand. Many people consult a financial advisor who can help ensure that their retirement and other investments are well diversified and appropriate to their goals and timeline. If you use a financial advisor, ask how he or she is compensated to ensure that you’re not being steered towards high-commission investments. A fee-only financial advisor does not earn commissions and instead charges you for his or her time.

What Are the IRA Withdrawal Rules?

There are two main types of withdrawals from a Traditional IRA: early withdrawals and required withdrawals (also called required minimum distributions or RMDs). You can start withdrawing money from your IRA as early as age 59½ without penalty, but you must start making your required withdrawals by age 70½. Withdrawals made before age 59½ are considered early distributions and are subject to additional taxes, except under certain circumstances. The IRS imposes stiff penalties for failing to take your required minimum distributions once you reach 70½: The amount not withdrawn is taxed at 50 percent!

Early Distributions

If you need to take money out of your IRA before reaching age 59½, the money you withdraw is taxed at your regular income tax rate. In addition, it may be subject to an additional 10 percent tax. However, there are some exceptions. You may be able to avoid the early withdrawal penalty for medical expenses, to purchase a first-time home, for certain educational expenses or for other special situations. View the IRS’ full list of exceptions to tax on early distributions.

Required Minimum Distributions

Once you reach age 70½, you must start withdrawing a certain percentage of funds from your IRA each year. These withdrawals are called required minimum distributions (RMDs).

Your RMD is based on your IRA account balance and your life expectancy as required by the IRS. It’s a complex calculation, so many people get advice from an accountant or financial advisor to help determine their required minimum distributions. The IRS also has details about calculating RMDs on its website.

The Bottom Line

Thanks to the favorable tax treatment, IRAs are one of the most efficient ways to invest and save for retirement. The sooner you start saving, the more your IRA can grow over time

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