When it comes to contributing to an IRA, the rules can be confusing. Traditional IRAs have no income limit, but contributions are only tax-deductible if you meet certain requirements. Roth IRAs, on the other hand, have a strict income limit and those with higher incomes cannot contribute at all. But what about those who don't have taxable compensation? Who can contribute to a traditional IRA? And what is the five-year rule of the Roth IRA? Read on to find out.Almost anyone can contribute to a traditional IRA, as long as they (or their spouse) receive taxable income and are younger than 70 and a half years old.
However, your contributions are tax-deductible only if you meet certain requirements. For more information on those requirements, see Who can contribute to a traditional IRA? No, there is no maximum income limit for a traditional IRA. Anyone can contribute to a traditional IRA.Roth IRAs have a strict income limit and people with higher incomes can't contribute at all. But if you don't have taxable compensation, you can open an IRA in your name and make contributions through a spousal IRA.
You may also want to make a non-deductible contribution, either because you prefer to allow your investments to grow tax-free and postpone income taxes, or because you want to make a clandestine contribution to a Roth IRA by contributing to your traditional IRA and then converting it into a Roth account.The five-year rule of the Roth IRA states that you cannot withdraw earnings tax-free until at least five years after you first contributed to a Roth IRA. This means that if you convert your traditional IRA into a Roth account, you must wait five years before withdrawing any earnings from the account without incurring taxes or penalties.Remember that you are also not subject to income limits when you contribute to a SIMPLE IRA or an SEP IRA; the options are only available if your employer offers them, if you are a small business owner, or if you are self-employed and can open one for yourself. In conclusion, anyone can contribute to a traditional IRA regardless of their income level. However, contributions are only tax-deductible if certain requirements are met.
Those with higher incomes cannot contribute to a Roth IRA at all. If you don't have taxable compensation, but you file a joint return with a spouse who earns income, you can open an IRA in your name and make contributions through a spousal IRA. Finally, the five-year rule of the Roth IRA states that you cannot withdraw earnings tax-free until at least five years after you first contributed to the account.
