IRA
An IRA (Individual Retirement Account) is a tax-advantaged retirement account owned by an individual rather than sponsored by an employer. Two main flavors: traditional (pre-tax contributions deductible at MAGI thresholds, taxable on withdrawal) and Roth (after-tax now, tax-free withdrawal in retirement). 2026 limits: $7,000 base, $1,000 catch-up at age 50+.
IRAs sit alongside 401(k)s in the US retirement architecture but operate under different code sections, different limits, and different aggregation rules. The aggregation rule matters most: every traditional, SEP, and SIMPLE IRA a taxpayer owns is aggregated for purposes of computing the taxable portion of a Roth conversion or distribution under §408(d)(2). This is the engine behind the pro-rata trap on backdoor Roth strategies.
Distribution rules vary by IRA type. Traditional IRA distributions are taxable as ordinary income, subject to a 10% early-withdrawal penalty under 59½ (with several exceptions: first-time homebuyer up to $10k, qualified higher-education, medical expenses above 7.5% of AGI, hardship under SECURE 2.0). RMDs begin at age 73 (rising to 75 in 2033 under SECURE 2.0). Roth IRA contributions can be withdrawn anytime tax- and penalty-free; earnings withdrawals require 5-year clock + 59½ for full qualified-distribution treatment.
IRAs can be funded directly (subject to MAGI phaseouts), via rollover from an employer plan (no contribution limit on rollovers), via inherited-IRA transfer, or via the backdoor strategy for high-income taxpayers. Each funding path has its own tracking implications: the basis of non-deductible contributions must be tracked across years on Form 8606, inherited IRAs are NOT in the §408(d)(2) aggregation, and rollover IRAs can be 'reverse-rolled' into a current 401(k) to clean the IRA balance for backdoor purposes.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Tax now | Deductible (with phaseouts) | After-tax |
| Tax at withdrawal | Ordinary income | Tax-free if qualified |
| RMDs | Yes, starting age 73 | None for owner |
| MAGI phaseout (single 2026) | For deduction only | For contribution: $146k–$161k |
| 5-year clock | No | Yes, for earnings |
Realistic IRA data carries the type (Traditional / Roth / SEP / SIMPLE / Inherited), basis (for non-deductible contributions tracked on Form 8606), beneficiary tree, and (for Roth IRAs) per-source contribution dates needed for the 5-year clock. Households should mix the strategies — some clean (no pre-tax IRA, can backdoor freely), some trapped (significant pre-tax IRA from rollover), some at the deductibility phaseout. Inherited IRAs should appear with their own RMD logic (10-year drain for non-spouse since SECURE Act).
Common pitfalls
- Forgetting the §408(d)(2) IRA aggregation when computing pro-rata on a Roth conversion — gives a wildly wrong tax answer.
- Treating Roth IRA earnings as available without 5-year-clock check — pre-clock earnings withdrawal is taxable and penalty-eligible.
- Storing inherited IRAs as if they were the heir's own — they have separate distribution rules, separate aggregation, separate basis tracking.
- Missing the SECURE Act 10-year rule for non-spouse beneficiaries inheriting in 2020 or later — the entire balance must drain by year 10.
Examples
Taxpayer has $93k pre-tax rollover IRA and contributes $7k non-deductible to a separate Traditional IRA, then converts the $7k. Aggregated December-31 balance: $100k. Pre-tax fraction: 93%. Taxable conversion: $6,510 — almost the entire 'tax-free' move.