Individual Retirement Arrangementss (IRAs) are individually established tax-sheltered accounts governed by IRC §408, “Individual Retirement Accounts” for traditional accounts and IRC §408A, “Roth IRAs” for Roth accounts. Rather than employer-sponsored plans, these accounts are established directly by you with a financial custodian.
The baseline contribution limit for Traditional and Roth IRAs combined is $7,500 in 2026 (plus an $1,100 catch-up contribution if you are age 50 or older). To contribute, you must have earned income (W-2 wages, net self-employment earnings, or taxable alimony) at least equal to the contribution amount.
The primary IRA structures include:
Contributions are made with pre-tax dollars, reducing your Adjust Gross Income (AGI) in the contribution year. The assets grow tax-deferred; ordinary income taxes are paid only upon distribution in retirement. However, if you or your spouse are covered by an active employer retirement plan (like a 401(k)), the ability to deduct your contribution phases out rapidly at higher income levels. For 2026, the phase-out ranges are:
If your household income exceeds these thresholds, your traditional contributions are entirely non-deductible.
If your income bars you from taking a tax deduction, you can still contribute up to $7,500 in after-tax dollars to a traditional IRA. Your contributions do not reduce your current taxable income, but the earnings grow tax-deferred. The massive drawback here is administrative complexity: you must file Form 8606 annually to track your after-tax basis. If you fail to do this, the IRS will tax your contributions again upon withdrawal. Outside of serving as the immediate funding mechanism for a backdoor Roth conversion (section “Backdoor Roth IRA”), holding a permanent balance in a non-deductible traditional IRA is an inferior strategy, as it converts preferential long-term capital gains on equities into ordinary income taxes upon distribution.
A basic payroll arrangement where an employer facilitates direct payroll deductions into a Traditional or Roth IRA chosen by the employee. It requires no plan documents, no employer contributions, and no reporting on Form 5500, serving as a friction-free option for small businesses that do not want the overhead of a full 401(k).
Established under IRC §408(k), “Simplified employee pension”, a SEP IRA allows employers (including sole proprietors) to make tax-deductible contributions directly to traditional IRAs established for employees. The contribution limit is exceptionally high: up to 25% of the employee’s compensation (or roughly 20% of net self-employment earnings for sole proprietors), capped at $72,000 in 2026. SEP IRAs are funded entirely by employer contributions; employees cannot make salary deferrals. Under SECURE 2.0, employers may now offer Roth SEP IRAs, though these contributions are treated as taxable income to the employee when made.
The Savings Incentive Match Plan for Employees, governed by IRC §408(p), “Simple retirement accounts”, is designed for businesses with 100 or fewer employees. It allows employees to make pre-tax salary reduction contributions up to $17,000 in 2026 (plus a $4,000 catch-up contribution for age 50+, or $5,250 for ages 60 to 63). Employers are required to make either a dollar-for-dollar match up to 3% of employee compensation, or a flat 2% non-elective contribution for all eligible employees. Importantly, the IRS aggregates employee elective deferrals across SIMPLE IRAs and 401(k) plans; if you participate in both, your combined employee deferral limit is capped at $24,500 in 2026. SECURE 2.0 also permits SIMPLE IRAs to accept Roth contributions if the plan adopts the provision.
The Salary Reduction Simplified Employee Pension, which was a hybrid plan combining features of a SEP and a 401(k). While no new SARSEPs could be established after December 31, 1996, existing plans are grandfathered. Eligible participants can continue to make pre-tax salary reduction contributions under the same rules as traditional 401(k) elective deferrals.
When managing these accounts, your asset location strategy should govern your allocation. Avoid placing cash, short-term bonds, or target-date funds in high-growth tax-sheltered wrappers. Direct your contributions toward stock funds to capture the power of long-term tax-free compounding, while holding tax-inefficient assets like high-yield bonds or real estate investment trusts (REITs) in pre-tax wrappers.
Favor pre-tax traditional accounts if your marginal tax rate today is higher than your expected rate in retirement, letting you capture tax bracket arbitrage. If you are in your peak earning years in California, facing a marginal tax rate near 50%, tax-deferred accounts are your highest priority.
An IRA is a trust or custodial account, and the document that brings it into existence is a model agreement from the Form 5305 series — the boilerplate the IRS publishes so a custodian need not draft one from scratch. When you open an account at a brokerage, you sign that institution’s version of one of these; you rarely see the bare form because banks and brokers use IRS-approved prototype documents that say the same thing in friendlier language. The fact that matters for the account holder: nothing in the 5305 series is filed with the IRS. You adopt it, you sign it, the custodian keeps it on file. It is the constitution of the account, not a return. Which form governs which account:
Form 5305 (trust) or Form 5305-A (custodial).
Form 5305-R (trust), Form 5305-RA (custodial), or Form 5305-RB (annuity endorsement).
Form 5305-S (trust) or Form 5305-SA (custodial) for the participant’s account; the separate employer plan document is Form 5304-SIMPLE or 5305-SIMPLE (section “Practical Setup Guides for Self-Employed Plans”).
The participant simply holds an ordinary traditional IRA; the employer adopts Form 5305-SEP as the plan (section “Practical Setup Guides for Self-Employed Plans”).
Form 5305-E (trust) or Form 5305-EA (custodial); the parallel HSA documents are Forms 5305-B and 5305-C (section “Health Savings Account (HSA)”).
The reporting you never see, and the forms you actually file. Because you do not file the 5305, the IRS learns the account exists through the custodian’s information returns, not yours. Each year the custodian files Form 5498, “IRA Contribution Information”, reporting your contributions, rollovers, Roth conversions, year-end fair market value, and whether an RMD is due — filed by May 31, which is why the form lands after you have already filed your return (it is informational; you do not attach it). Distributions come back to you on Form 1099-R; the HSA and Coverdell analogues are Forms 5498-SA and 5498-ESA. What you file is narrower and easy to miss: Form 8606 to report nondeductible traditional contributions, Roth conversions, and basis (section “Backdoor Roth IRA”), and Form 5329 to report and pay the penalties on early withdrawals, excess contributions, or a missed RMD. The division of labor is the whole point — the custodian documents the account and reports the money flows; you report only the tax characteristics the custodian has no way to know.
An April 2026 executive order established TrumpIRA.gov | https://www.trumpira.gov, a federal platform that connects working Americans — independent contractors, part-time workers, small-business employees, and the self-employed — with low-cost IRAs and routes them toward the federal IRC §6433, “Saver’s Match” matching contribution. Understand what it is before you decide whether it is for you: the government did not create a new account type: it built a directory. The substance is an information-asymmetry reducer. By conditioning a listing on a 0.15% expense-ratio cap and a no-minimum-balance rule, the administration forces the listed institutions to commoditize their offerings and compete for the matching-contribution traffic.
For the reader this book is written for, that is precisely the problem. If you find yourself opening an account from the TrumpIRA.gov directory, you have already mis-sized your strategy. These are vanilla products engineered for the lowest common denominator — no access to private credit, derivatives, direct indexing, or the tax-loss-harvesting and asset-location machinery that does the real work at your scale (section “Individual Retirement Arrangements (IRAs)”).
The Saver’s Match is welfare, not a strategy. The match under IRC §6433 pays 50% of the first $2,000 of retirement contributions — a maximum of $1,000 — and it does not come to you as cash. The government deposits it directly into your retirement account, and the rules bar that account from being a Roth, so the “free” money lands in a pre-tax bucket you will be taxed on later. It replaces the old nonrefundable Saver’s Credit (section “The Dual Role of Taxes: Funding Societies and Shaping Behaviors”) and first applies to tax years beginning after December 31, 2026 — so the earliest you could claim it is on a 2027 return. Eligibility tracks the credit it supersedes: you must be at least 18, not a dependent, and not a full-time student.
The phase-out is brutal and is the whole story for you. For joint filers the match starts shrinking at $41,000 of modified AGI and is gone entirely by $71,000; single filers run from $20,500 to $35,500. To qualify you would have to suppress your income to a degree that is grossly inefficient for a high earner — and the prize for that contortion is $1,000, a rounding error bundled with reporting, a federal record of the account, and a clawback (the “recovery payment” under IRC §6433) that bills you back if you take an early distribution. Leave the match to the retail crowd it was designed for. If you want cheap, broad diversification, a standard index fund at a private-sector brokerage — without the listing constraints or the matching strings — beats the directory on every metric that reaches your bottom line. The one defensible use is paternalistic, not personal: a clean, zero-overhead way to get a low-wage household employee or an adult child early in their career — so long as they are not your dependent — into a funded, indexed account they would not otherwise open.
The non-deductible traditional IRA is an investment wrapper that accepts after-tax contributions while deferring the taxation of eventual growth. While anyone with earned income can contribute to a non-deductible IRA regardless of income levels, its utility is highly specialized.
To make a contribution to any IRA, you must have earned income. If you are married and one spouse does not work, you can utilize a spousal IRA under the provisions of IRC §219, “Spousal IRA”. This enables the working spouse to fund a separate IRA for the non-working spouse up to the annual limit ($7,500 in 2026, or $8,600 if the non-working spouse is age 50 or older), provided the working spouse’s earned income covers both contributions.
Traditional IRAs are subject to strict withdrawal structures:
For early retirees seeking penalty-free access to traditional IRA balances before age 59.5, the primary mechanism is the 72(t) exception. Under IRC §72(t)(2)(A)(iv), “Exceptions to 10-percent additional tax on early distributions”, you can establish a schedule of substantially equal periodic payments (SEPP).
To execute a 72(t) schedule, you must calculate your annual distribution using one of three IRS-approved methods:
Once established, the 72(t) payout schedule is highly rigid. You must maintain the withdrawals for at least five years or until you reach age 59.5, whichever is longer. If you start a 72(t) schedule at age 56, you must continue it until age 61. If you start at age 50, you must continue it for over nine years.
The structural danger of a 72(t) schedule is its absolute zero-tolerance policy for errors. If you modify the account balance in any way outside the mandated schedule—such as making an additional contribution, executing an unapproved rollover, or miscalculating a withdrawal by even a single dollar—the entire 72(t) agreement is shattered. The IRS will retroactively revoke the penalty waiver, levying the 10% early withdrawal penalty plus accumulated interest on every single distribution taken since the inception of the schedule. For a high-net-worth individual who has drawn $100,000 annually for four years, a minor banking error can trigger a sudden six-figure tax liability. Execute this strategy only with professional oversight and dedicated, isolated accounts.
A Roth IRA, established under the authority of IRC §408A, “Roth IRAs”, is a tax-advantaged retirement wrapper funded entirely with after-tax dollars. While you receive no upfront tax deduction, the assets grow tax-free, and all qualified distributions in retirement are completely exempt from federal and state income taxes.
The Roth IRA possesses several distinct operational advantages:
Unlike traditional IRAs and defined contribution plans, you are never forced to take required minimum distributions from a Roth IRA during your lifetime. The assets can remain in the tax-free wrapper compounding indefinitely, serving as the ultimate vehicle for generational wealth transfer.
Under IRC §408A(d)(4), the IRS treats distributions from a Roth IRA as coming first from your original contributions, then from conversions, and lastly from earnings. Because you have already paid tax on your contributions, you can withdraw your principal at any time, at any age, for any reason, completely tax-free and penalty-free.
To withdraw the earnings tax-free, the distribution must be qualified (made after age 59.5, disability, or death) and the account must have been open for at least five tax years. This five-year clock begins on January 1 of the tax year for which you make your first contribution or conversion.
For 2026, direct annual contributions to a Roth IRA are capped at $7,500 (plus $1,100 as a catch-up contribution if you are age 50 or older). However, direct contributions are subject to strict income limitations. Your ability to contribute directly phases out over the following MAGI ranges:
$153,000 to $168,000.
$242,000 to $252,000.
If your household income exceeds these limits, your direct contribution limit is $0. However, as analyzed in section “Backdoor Roth IRA”, high earners can easily bypass this barrier using the backdoor Roth IRA technique.
If you exceed these limits or contribute more than your earned income, the IRS levies a stiff 6% annual excise tax on the excess contribution under IRC §4973, “Tax on excess contributions to individual retirement accounts” for every year the excess remains in the account. To avoid this penalty, you must remove the excess contribution and any attributable earnings before the due date of your tax return (including extensions). The earnings will be taxable as ordinary income in the year contributed, but the 6% penalty will be completely waived.
A Roth IRA is the ideal location for high-growth, tax-inefficient assets. Equities, active growth funds, and high-yield real estate investment trusts (REITs) thrive in this wrapper, where their high turnover and dividend yields compound silently, free from the annual tax drag of a taxable account.
The Backdoor Roth is an indispensable planning mechanism that allows high earners to bypass direct Roth IRA income restrictions. Because direct Roth IRA contributions are barred above certain income limits, this strategy utilizes a two-step process: making a non-deductible traditional IRA contribution and immediately converting those funds to a Roth IRA.
To execute the backdoor Roth strategy cleanly, you must navigate three structural steps:
The primary obstacle to a tax-free backdoor Roth conversion is the IRS pro-rata rule under IRC §408(d)(2). When you execute a Roth conversion, the IRS does not view your non-deductible contribution as an isolated asset. Instead, it aggregates all your traditional, SEP, and SIMPLE IRAs as of December 31 of the conversion year. The conversion’s tax liability is determined by the ratio of pre-tax assets to after-tax assets across all aggregated accounts.
If you have $92,500 of pre-tax assets in a traditional IRA and contribute $7,500 in after-tax dollars to a new traditional IRA, your total IRA balance is $100,000. If you attempt to convert only the $7,500 to a Roth IRA, the IRS rules dictate that 92.5% of the conversion is treated as taxable ordinary income. You are hit with a massive, unexpected tax bill.
To clear this hurdle, you must reduce your pre-tax IRA balances to $0 before December 31 of the conversion year. You can accomplish this by executing an in-service rollover of all pre-tax traditional, SEP, and SIMPLE IRA assets into your active employer-sponsored 401(k) or 403(b) plan. Because employer-sponsored plans do not enter the pro-rata calculation, this move isolates your after-tax IRA basis, enabling a 100% tax-free conversion.
Inherited IRAs held by you as a beneficiary do not count toward this pro-rata calculation, provided they remain strictly categorized as inherited accounts. Note that if you are married, IRAs are individually owned; your spouse’s pre-tax IRA balances do not affect your personal pro-rata calculations, though they will impact their own backdoor Roth attempts.
Once your pre-tax IRA balance is cleared to $0, contribute up to the standard limit ($7,500 in 2026, or $8,600 if age 50 or older) to a traditional IRA as a non-deductible contribution. Because there are no income limits on non-deductible traditional IRA contributions, anyone with earned income can execute this step.
Immediately after the contribution settles, convert the traditional IRA balance to your Roth IRA. Because the conversion occurs before the funds can accumulate meaningful investment earnings, the tax liability is $0. The transaction is reported as a conversion in Part II of Form 8606, not a recharacterization.
To simplify your tax reporting, you must execute both the contribution and the conversion within the same calendar year. While the IRS allows you to make traditional IRA contributions for tax year X up to April 15 of year X+1, the Roth conversion is strictly reported in the calendar year in which the transaction occurs.
If you make a late contribution for year X in April of year X+1 and convert it immediately, the contribution is reported on year X’s tax return, but the conversion must be reported on year X+1’s tax return. This temporal mismatch forces you to carry over your non-deductible basis on Part I of Form 8606 in year X, then reconcile it with the conversion in Part II of Form 8606 in year X+1. While legally permissible, this mismatch is a bookkeeping headache that increases the risk of accounting errors. Executing both transactions in the same calendar year ensures a clean slate, where your non-deductible basis is fully created and fully converted on a single tax return.
See section “Tax Reporting of Backdoor Roth IRA” for detailed instructions on tax reporting.