A 408 IRA is a Traditional Individual Retirement Account authorized under Internal Revenue Code Section 408(a): a trust or custodial account that lets you contribute earned income on a pre-tax or after-tax basis, grow investments without paying annual tax on gains, and defer income tax until you take the money out in retirement. For 2026, you can contribute up to $7,500, or $8,600 if you’re 50 or older, and depending on your income and whether you have a workplace retirement plan, some or all of that contribution may be deductible.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The upfront tax break comes with a long list of rules covering who can contribute, what the account can hold, and when the money can come out.
Who Can Open and Contribute to One
You need earned income. Wages, salaries, commissions, and self-employment income count. Investment income, rental income, and pension payments don’t. Your contribution for the year can’t exceed your total earned income, so someone who earned $3,000 can contribute only $3,000 even though the cap is higher.2Internal Revenue Service. Retirement Topics – IRA Contribution Limits
There is no age limit. As long as you have earned income, you can keep contributing at any age. A non-working spouse can also contribute to their own IRA through a spousal IRA, provided the couple files jointly and the working spouse earns enough to cover both contributions.
To open the account, you sign a written trust or custodial agreement with a qualified financial institution such as a bank, brokerage, or insurance company. That institution acts as trustee or custodian and is responsible for administering the account under federal tax law.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts The deadline to contribute for any tax year is your federal income tax filing deadline, typically April 15 of the following year, without regard to extensions.4Internal Revenue Service. Traditional and Roth IRAs
2026 Contribution Limits
For 2026, the maximum annual IRA contribution is $7,500. If you’re age 50 or older by year-end, you can add a $1,100 catch-up, bringing the total to $8,600.5Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions These limits are combined across all your Traditional and Roth IRAs. You can split contributions between the two account types however you want, but the total can’t exceed the cap.
Anyone with earned income can contribute up to the limit regardless of income. The income-based restrictions below affect only whether you can deduct the contribution.
When the Contribution Is Deductible
Two factors control the deduction: whether you or your spouse participate in a workplace retirement plan like a 401(k), and how much you earn. If neither of you is covered by a workplace plan, every dollar is fully deductible no matter your income.
When you are covered by a workplace plan, the deduction phases out over a range of Modified Adjusted Gross Income. For 2026:6Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
- Single or head of household, covered by a plan: full deduction with MAGI of $81,000 or less, partial between $81,000 and $91,000, none above $91,000.
- Married filing jointly, contributor covered by a plan: full deduction with MAGI of $129,000 or less, partial between $129,000 and $149,000, none above $149,000.
- Married filing jointly, contributor not covered but spouse is: full deduction with MAGI of $242,000 or less, partial between $242,000 and $252,000, none above $252,000.
Inside the phase-out range, the deduction shrinks proportionally. Someone at the midpoint deducts roughly half.
Nondeductible Contributions and Form 8606
Contributions you can’t deduct are called nondeductible. You can still make them; you just don’t get the upfront tax break. Growth inside the account is still tax-deferred, which is the reason to bother.
Tracking them is critical. Report each year’s nondeductible contribution on IRS Form 8606.7Internal Revenue Service. About Form 8606, Nondeductible IRAs That form establishes your basis, the portion you’ve already paid tax on. Without it, you’ll pay tax twice: once when you earned the money and again when you withdraw it. If you’ve made nondeductible contributions in prior years without filing Form 8606, filing it retroactively is worth the effort.
What a 408 IRA Can and Can’t Hold
The account can hold most conventional investments: stocks, bonds, mutual funds, ETFs, certificates of deposit, and similar assets. Two categories are barred by statute, and the consequences of stepping on either can wipe out the account.
Life Insurance and Collectibles
No IRA funds can be invested in life insurance contracts. Buying a collectible inside an IRA is treated as a taxable distribution equal to the purchase price. Collectibles include artwork, rugs, antiques, gems, stamps, coins, and alcoholic beverages. Certain precious metals are exempt: gold, silver, platinum, and palladium bullion can be held in an IRA if the metal meets minimum fineness standards set by regulated commodities exchanges and the bullion is stored by the IRA trustee rather than at home.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts Specific U.S. Mint coins, including American Eagle gold and silver coins, also qualify.
Prohibited Transactions
A prohibited transaction is any deal between your IRA and yourself or certain family members and business entities. Borrowing money from the IRA, using it as collateral, or selling property to it are all examples. The penalty is severe. If a prohibited transaction occurs, the IRA loses its tax-advantaged status as of the first day of that tax year. The entire balance is treated as distributed at fair market value, triggering income tax on the full amount, plus the 10% early withdrawal penalty if you’re under 59½.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts Few IRA mistakes can blow up an entire account in a single stroke, but this one can.
How Withdrawals Are Taxed
Money you withdraw from a 408 IRA is generally taxed as ordinary income in the year you receive it. That’s the flip side of the deduction: you got a break going in and you pay tax coming out. The tax applies to both the original deductible contributions and all investment earnings that accumulated tax-free inside the account.
If you made nondeductible contributions, the portion of each withdrawal attributable to those contributions comes out tax-free. The IRS applies a pro-rata rule: it takes your total nondeductible basis across all your Traditional IRAs and divides it by the total value of all your Traditional IRA balances. That fraction of any distribution is tax-free; the rest is taxable.7Internal Revenue Service. About Form 8606, Nondeductible IRAs You can’t cherry-pick which dollars come out first. The IRS treats all your Traditional IRAs as one pool for this calculation.
Taking Money Out Before 59½
Withdrawals before age 59½ get hit with a 10% additional tax on top of the regular income tax owed. The penalty applies to the taxable portion of the distribution.8Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
The IRS allows a number of exceptions. The most commonly used include:9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Distributions due to the account owner’s total and permanent disability, or paid to a beneficiary after the owner’s death.
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income for the year.
- Qualified higher education expenses like tuition, fees, and books for you, your spouse, or dependents.
- First-time home purchase, up to $10,000 over your lifetime for buying, building, or rebuilding a first home.
- Substantially equal periodic payments (SEPP), a series of withdrawals calculated using life expectancy tables. Once you start, you must continue for five years or until age 59½, whichever comes later. Modifying the payments early triggers the 10% penalty retroactively on all prior distributions, plus interest.10Internal Revenue Service. Determination of Substantially Equal Periodic Payments Notice 2022-6
- Emergency personal expenses, one withdrawal per year of up to $1,000 for unforeseeable personal or family emergencies (available for distributions after December 31, 2023).
Even when the 10% is waived, regular income tax still applies to the taxable portion. The exceptions save you the penalty, not the underlying tax.
Required Minimum Distributions
You can’t leave the money in a 408 IRA forever. At age 73, you must begin taking Required Minimum Distributions each year. That starting age rises to 75 in 2033.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Your first RMD is due by April 1 of the year after you turn 73. Every RMD after that is due by December 31. Delaying the first one to April 1 means you’ll take two taxable distributions in the same calendar year, which can push you into a higher bracket.
The RMD is calculated by dividing your account balance as of December 31 of the prior year by a life expectancy factor from IRS tables. If you own multiple Traditional IRAs, you calculate the RMD for each one separately but can pull the total from whichever account or combination of accounts you choose.
Missing an RMD carries a 25% excise tax on the shortfall. Catch it and withdraw the correct amount within two years and the penalty drops to 10%.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Qualified Charitable Distributions
If you’re 70½ or older, you can transfer money directly from your 408 IRA to a qualified charity through a Qualified Charitable Distribution. For 2026, the annual QCD limit is $111,000 per person, adjusted annually for inflation. A QCD counts toward your RMD for the year, but the transferred amount is excluded from your taxable income.12Internal Revenue Service. Seniors Can Reduce Their Tax Burden by Donating to Charity Through Their IRA
The advantage over simply withdrawing and writing a check is real. A regular withdrawal raises your adjusted gross income even if you offset it with a charitable deduction, which can affect Medicare premiums, taxation of Social Security benefits, and other income-dependent calculations. A QCD avoids all of that because the money never appears as income. The transfer must go directly from the IRA custodian to the charity; you can’t withdraw the funds and then donate them.
Moving Money Between Accounts
Moving retirement money is one of the most common IRA transactions and also where expensive mistakes happen. The rules depend on the method.
Direct Transfers
A trustee-to-trustee transfer moves money directly from one IRA custodian to another without you ever touching the funds. No tax withholding, no 60-day deadline, no limit on frequency. If you’re switching providers, this is almost always the right move.13Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
60-Day Rollovers
An indirect rollover means you receive the distribution personally, then redeposit it into an IRA or qualified plan within 60 calendar days. Miss the deadline by a day and the whole amount is treated as a taxable distribution, potentially with the 10% early withdrawal penalty on top.13Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Two more traps apply. First, you can only do one IRA-to-IRA rollover in any 12-month period, and the IRS counts all your IRAs as one for this purpose. Trustee-to-trustee transfers, Roth conversions, and rollovers from employer plans to IRAs don’t count against the limit. Second, if you’re rolling out of an employer plan like a 401(k), the plan administrator is required to withhold 20% for federal taxes. You’ll need to cover that 20% from other funds to roll over the full amount, or the withheld portion becomes a taxable distribution.
If you miss the 60-day deadline for reasons beyond your control, such as a family emergency, hospitalization, or a postal error, you can self-certify for a waiver using the model letter in IRS Revenue Procedure 2016-47. The qualifying reasons are specific, and you must complete the rollover as soon as the obstacle is resolved, typically within 30 days. Self-certification is not a guarantee; the IRS can reject the waiver on audit.14Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement
Roth Conversions
A Roth conversion moves money from a 408 IRA to a Roth IRA. The converted amount is taxed as ordinary income in the year of conversion, but future growth and qualified withdrawals from the Roth are tax-free. There’s no income limit on conversions; anyone can do one regardless of earnings.
If you’re combining a nondeductible contribution with a conversion (the backdoor Roth approach), watch the pro-rata rule. If you have any pre-tax money in any Traditional IRA, including SEP and SIMPLE IRAs, the conversion is treated as coming proportionally from pre-tax and after-tax dollars. That can create a surprise tax bill on money you expected to convert tax-free.7Internal Revenue Service. About Form 8606, Nondeductible IRAs
What Happens to the Account After Death
What happens depends on who inherits. The SECURE Act changed the rules for most beneficiaries starting in 2020, and the changes catch many heirs off guard.
Surviving Spouses
A surviving spouse has the most flexibility. They can roll the inherited IRA into their own and treat it as always theirs, following normal contribution and distribution rules. Alternatively, they can keep it as an inherited IRA, which lets them delay RMDs until the year the deceased spouse would have turned 73. A surviving spouse is also the only beneficiary allowed to convert an inherited IRA to a Roth IRA.
Other Beneficiaries and the 10-Year Rule
Most non-spouse beneficiaries must empty the entire inherited IRA by December 31 of the 10th year after the owner’s death.15Internal Revenue Service. Retirement Topics – Beneficiary If the original owner had already started taking RMDs before dying, the beneficiary must also take annual distributions during the 10-year window. Whatever remains at the end of year 10 has to come out.
A narrow group of eligible designated beneficiaries can stretch distributions over their own life expectancy instead:
- Minor children of the deceased owner. They can stretch until reaching the age of majority, then the 10-year clock starts.
- Disabled or chronically ill individuals.
- Beneficiaries not more than 10 years younger than the deceased owner.
Beneficiaries who don’t qualify, including most adult children, siblings, and friends, are locked into the 10-year rule with no exceptions.
Excess Contribution Penalty
Contributing more than the annual limit, contributing without earned income, or failing to remove an ineligible contribution triggers a 6% excise tax on the excess. The penalty repeats every year the excess stays in the account. Catch it before your tax filing deadline (including extensions) and you can withdraw the excess plus any earnings it generated to avoid the penalty entirely. After the deadline, you can apply the excess to the next year’s contribution if you have room under that year’s limit, but the 6% penalty applies for any year the excess sits untouched.
Creditor Protection
Traditional IRAs are not covered by ERISA, the federal law that gives broad creditor protection to employer-sponsored plans like 401(k)s. Outside of bankruptcy, IRA protection varies entirely by state. Some states fully exempt IRAs from creditors; others protect only what’s reasonably necessary for retirement.
In federal bankruptcy, Traditional and Roth IRA assets are protected up to $1,711,975, adjusted every three years for inflation.16Office of the Law Revision Counsel. 11 USC 522 – Exemptions Money rolled into an IRA from an employer plan doesn’t count against that cap; it retains the unlimited protection of the original plan. If you’ve rolled over a large balance from a workplace plan, keeping records that trace those dollars is worth the effort should creditor issues ever arise.