Earned income is a requirement to contribute to a traditional IRA, and your annual contributions to an IRA cannot exceed what you earned that year. With a traditional, cumulative, SEP or SIMPLE IRA, you make pre-tax contributions (if your income is below a certain level and meets certain other requirements) and you don't pay taxes until you withdraw money. And there's an exception to the earned income requirement for spouses who have no income, called a spousal IRA. If neither you nor your spouse (if any) participate in a work plan, your traditional IRA contribution is always tax-deductible, regardless of your income.
Certain retirement plans, such as a simplified employee pension (SEP) and a SIMPLE (supplemental savings incentive plan for employees of small employers), can be configured as IRAs, although they work a little differently than what you create yourself. All IRA contributions for a calendar year must be made in full before you file your tax return for that year, usually April 15, unless that deadline expires on a weekend. An IRA can be an individual retirement account that you open with a financial services company, such as a bank, brokerage firm or mutual fund company, or an individual retirement annuity that is available through an insurance company. When IRAs were first introduced, there was only one basic type, which was open to anyone with earned income.
Just as IRA rules generally discourage you from withdrawing your money too soon, others require you to start withdrawing money from a traditional IRA no later than April 1 of the year following the year you turn 72.The amount of your RMD is calculated by dividing the value of your traditional IRA by a life expectancy factor, as determined by the IRS. Form 5498 Reporting incorrect information on Form 5498, Information on IRA Contributions, can cause taxpayers to make mistakes when reporting the IRA on their tax returns. In the case of a Roth IRA, you can make a distribution of contributions without penalties or federal taxes at any time. The government charges a 10% penalty for early withdrawals from a traditional IRA, and a state tax penalty may also apply.