Rules for ETFs in an IRA: Taxes, Limits, and RMDs

You can buy ETFs in an IRA the same way you buy them in a regular brokerage account: open a self-directed IRA at a brokerage, fund it, and place an order by ticker symbol. What changes is the tax treatment. Every dividend and capital gain the ETF generates stays inside the account, sheltered from annual tax, and for 2026 you can put up to $7,500 in ($8,600 if you’re 50 or older) across your Traditional and Roth IRAs combined.¹ The mechanics are simple. The rules around who can contribute, when you can take money out, and which ETFs cause problems are where the planning happens.

What the IRA Tax Shelter Actually Does for Your ETFs

In a taxable brokerage account, an ETF that pays dividends or distributes capital gains generates a 1099 every year, and you owe tax on that income whether or not you spent it. Inside an IRA, none of that reporting happens. Brokers aren’t required to issue a 1099-DIV or 1099-B for transactions within the account.²³ You can sell one ETF, buy another, collect dividends, and reinvest them all year without triggering a taxable event.

The tax bill comes later, and how it comes depends on the IRA type.

Traditional IRA

Contributions may be deductible in the year you make them, and everything grows tax-deferred. When you withdraw in retirement, every dollar is taxed as ordinary income. There’s no preferential long-term capital gains rate on ETF gains inside a Traditional IRA, no matter how long the fund was held. That’s usually a good deal if your retirement tax bracket is lower than your working-years bracket.

Roth IRA

Contributions go in with after-tax dollars, so no upfront deduction. In exchange, qualified withdrawals of both contributions and earnings come out completely tax-free.⁴ For earnings to qualify, you must be at least 59½ and at least five years must have passed since January 1 of the year of your first Roth contribution. Original contributions can come out anytime, tax and penalty free.

The International ETF Wrinkle

Foreign governments withhold tax on dividends paid by their companies. In a taxable account, you can claim a foreign tax credit to offset that withholding. Inside an IRA, you can’t, because the account’s activity doesn’t appear on your tax return. The foreign tax is lost. For broad international ETFs yielding 2–3%, the drag compounds over decades. Investors with both taxable and IRA accounts sometimes hold international ETFs in the taxable account and domestic ETFs in the IRA for that reason.

2026 Contribution Limits and Who Can Contribute

The $7,500 annual limit ($8,600 with the age-50 catch-up) applies across all your Traditional and Roth IRAs combined. Your contribution also can’t exceed your taxable compensation for the year, so if you earned $5,000, $5,000 is your cap.⁵

Anyone with earned income can contribute to a Traditional IRA. Whether the contribution is deductible depends on income and workplace coverage.⁶ If neither you nor your spouse has a workplace retirement plan, the full contribution is deductible at any income. If a workplace plan is in the picture, the deduction phases out:

Single filers covered by a workplace plan: $81,000–$91,000 MAGI.
Married filing jointly, contributing spouse covered: $129,000–$149,000.
Married filing jointly, only the other spouse covered: $242,000–$252,000.¹

Roth IRAs have income eligibility limits that apply to everyone. For 2026, single filers can contribute fully below $153,000 MAGI, with a partial contribution phase-out up to $168,000. Married filing jointly phases out between $242,000 and $252,000. Above those ceilings, direct Roth contributions aren’t allowed, though a backdoor route exists.¹

Opening and Funding the Account

To buy ETFs you need a self-directed brokerage IRA, not a bank IRA or one restricted to proprietary mutual funds. Most major online brokerages offer both Traditional and Roth IRAs with no account minimum and commission-free ETF trading. Before opening, confirm the platform carries the specific ETFs you want and check commission structures for specialty funds.

You can put money in two ways.

Direct Contributions

Transfer cash from your bank, up to the annual limit. Contributions for a given tax year can be made anytime from January 1 of that year through the following April tax filing deadline.⁵

Rollovers From an Old 401(k) or Another IRA

Rollover money doesn’t count against the annual limit, so you can move a much larger sum at once.⁵ The cleanest method is a direct trustee-to-trustee transfer, where your old custodian sends the funds straight to the new one. No withholding, no time limits.⁷

With an indirect rollover, the check comes to you and you have 60 days to redeposit the full amount into the new IRA. Miss the window and the distribution becomes taxable, potentially with a 10% early withdrawal penalty. The IRS also limits you to one indirect rollover per year across all your IRAs. Direct transfers are unlimited.⁷

Placing the Trade

Once cash settles in the account, buying an ETF works like buying a stock. Enter the ticker, the number of shares, and the order type.

Two basic order types cover almost everything. A market order fills immediately at the best available price. A limit order sets the maximum price you’ll pay and only fills at or below that price. For large, heavily traded ETFs tracking indexes like the S&P 500 or total stock market, market orders are fine; the bid-ask spread is usually a penny or two. For niche ETFs with lower trading volume, a limit order protects you from paying more than expected when the spread widens.

Many brokerages support fractional shares. If a fund trades at $450 and you want to invest $100, you can buy 0.22 shares. That matters in an IRA where you want the full contribution working rather than sitting as cash.

ETFs to Approach With Caution

Leveraged and Inverse ETFs

Leveraged ETFs aim to deliver two or three times the daily return of an index. Inverse ETFs bet against an index. Both reset daily, so their long-term returns can drift far from the stated multiple. A leveraged ETF tracking an index that ends the year flat can still lose money because of daily reset compounding. These are short-term trading products, not the buy-and-hold profile a retirement account rewards.

Commodity and Futures-Based ETFs

Certain ETFs that invest in commodities through futures contracts or limited partnership structures can generate unrelated business taxable income (UBTI) inside an IRA. If gross UBTI in your IRA exceeds $1,000 in a year, the IRA’s trustee must file IRS Form 990-T, and the account owes tax on the income at trust tax rates.⁸ Trust brackets compress fast, with income above $15,650 taxed at 37%.

Standard equity, bond, and REIT ETFs that hold actual securities carry negligible UBTI risk. The issue concentrates in ETFs using futures-based strategies or holding direct partnership interests. Before buying any commodity or alternative-strategy ETF for your IRA, check the prospectus for UBTI disclosures. Broad commodity ETFs structured as grantor trusts (such as those holding physical gold) generally don’t generate UBTI; those structured as limited partnerships often do.

Cryptocurrency ETFs

Spot Bitcoin and other cryptocurrency ETFs are eligible to be held in an IRA and trade on exchanges like any other ETF. Standard IRA tax rules apply to their gains and dividends. One limitation worth knowing: you can’t move crypto you already own into an IRA. You have to buy the ETF shares with cash inside the account.

Getting Money Out

Before Age 59½

Traditional IRA withdrawals before 59½ trigger ordinary income tax plus a 10% early withdrawal penalty. For Roth IRAs, you can always pull out your original contributions tax and penalty free, but earnings withdrawn early face the 10% penalty unless an exception applies.⁹

The IRS waives the 10% penalty in several situations:

First-time home purchase, up to $10,000 lifetime
Higher education expenses for you, your spouse, children, or grandchildren
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income
Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 consecutive weeks
Total and permanent disability
Substantially equal periodic payments, continuing at least five years or until 59½, whichever is longer
Birth or adoption, up to $5,000 per child within one year of the event
Federally declared disaster, up to $22,000 for qualified individuals with economic loss
Domestic abuse victim, the lesser of $10,000 or 50% of the account, for distributions made after December 31, 2023

These exceptions waive only the 10% penalty. Traditional IRA withdrawals remain taxable as ordinary income. For Roth IRAs, earnings that avoid the penalty under an exception may still be taxable if the five-year rule hasn’t been satisfied.⁹

After Age 73: Required Minimum Distributions

Starting at 73, the IRS requires annual withdrawals from your Traditional IRA. Required minimum distributions are calculated by dividing the account balance by a life expectancy factor from IRS tables. Your first RMD is due by April 1 of the year after you turn 73; subsequent RMDs are due by December 31 each year.¹⁰

Miss an RMD and the penalty is 25% of the amount you should have withdrawn. Catch the mistake and correct it within two years, and the penalty drops to 10%.¹¹¹²

Roth IRAs have no required minimum distributions during the owner’s lifetime.¹¹ Your investments keep growing tax-free for as long as you live. RMDs matter for ETF planning because you’ll need to sell shares or take enough in dividends to cover the annual withdrawal. Holding a portion of your Traditional IRA in liquid, low-volatility ETFs as you approach 73 avoids forced equity sales during a downturn.

If Your Income Exceeds the Roth Limits

There’s no income limit on non-deductible Traditional IRA contributions, and no income limit on converting a Traditional IRA to a Roth. Contributing non-deductible money and then converting it is the backdoor Roth strategy.

The complication is the IRA aggregation rule. The IRS treats all your Traditional IRA balances as one pool when calculating tax on a conversion. If you have $90,000 in a pre-tax rollover IRA and contribute $7,500 in non-deductible money, you can’t convert only the $7,500 tax-free. Roughly 92% of any conversion is taxable, based on the ratio of pre-tax to after-tax money across all your Traditional IRAs. The strategy works cleanly when you have little or no pre-tax Traditional IRA balance. If you do, rolling that balance into a current employer’s 401(k) before converting can sidestep the aggregation problem.

Each conversion starts its own five-year clock for penalty-free withdrawal of the converted amount. A conversion must be completed by December 31 to count for that tax year, and you’ll file IRS Form 8606 to track non-deductible contributions.

What an IRA Can’t Hold

IRAs can hold nearly any publicly traded ETF, but a few things are off-limits. Buying a collectible with IRA funds is treated as an immediate distribution, meaning income tax and potentially the 10% penalty on the purchase amount. Collectibles include artwork, rugs, antiques, gems, stamps, most coins, and alcoholic beverages.¹³ An ETF that holds physical gold through a trust structure is generally fine because you own fund shares, not the metal.

Transactions with “disqualified persons” — yourself, family members, and businesses you control — can disqualify the account and make its full value immediately taxable. That rule rarely affects a straightforward ETF portfolio, but it matters if you also use a self-directed IRA for alternative investments.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Internal Revenue Service. Instructions for Form 1099-B (2026)
3
Internal Revenue Service. Instructions for Form 1099-DIV (01/2024) – Introductory Material
4
Internal Revenue Service. Roth IRAs
5
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
6
Internal Revenue Service. IRA Deduction Limits
7
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
8
Internal Revenue Service. Instructions for Form 990-T (2025)
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
13
Internal Revenue Service. Investments in Collectibles in Individually Directed Qualified Plan Accounts