IRAs: Traditional and Spousal

What an IRA is. Unlike a 401(k), which your employer sponsors, an IRA is opened by you at a bank or brokerage. That independence is its advantage: you're not stuck with a limited menu of funds or a plan's fee structure — you can hold nearly any stock, bond, ETF, or mutual fund, and shop for the lowest costs. The tradeoff is a smaller annual limit.

The 2026 limits and the earned-income rule. You can contribute up to $7,500 total across all your IRAs (traditional and Roth combined), plus $1,100 more if you're 50 or older — so $8,600 for older savers. One firm requirement: you must have earned income (wages or self-employment income) at least equal to your contribution. Investment income, Social Security, and pensions don't count. This is where the spousal rule becomes essential.

Traditional IRA deductibility. Contributions to a traditional IRA may be deductible, but the rules depend on whether you're covered by a workplace plan: - If neither you nor your spouse is covered by a workplace plan, your traditional IRA contribution is fully deductible regardless of income. - If you are covered by a workplace plan, the deduction phases out for 2026 between $81,000–$91,000 of income (single) and $129,000–$149,000 (married filing jointly). - If your spouse is covered but you aren't, your deduction phases out between $242,000–$252,000 (joint).

Above these ranges you can still make a traditional IRA contribution — it's just non-deductible. Non-deductible contributions create "basis" you track on Form 8606 so you're not taxed twice later, and they're the raw material for the backdoor Roth (Chapter 3).

The spousal IRA — a full account for the non-earner. Normally you need your own earned income to fund an IRA. The spousal IRA is the exception, and it's genuinely valuable: if you file jointly and one spouse has enough earned income, the other spouse can fund a full IRA of their own — up to the same $7,500 (+$1,100 catch-up) — even with zero personal income. The contribution goes into an account in the non-earning spouse's own name (it's still individual). The only limit is that the working spouse's earned income must cover both contributions combined.

Traditional IRA vs. 401(k) — when each shines. They're complements, not rivals. The 401(k) has a much higher limit ($24,500 vs. $7,500) and often an employer match, so it's usually the first priority up to the match. The IRA's edge is choice and cost — no plan menu, no plan fees. A common sequence: fund the 401(k) to the match, then max an IRA (often a Roth, Chapter 3), then return to the 401(k) for more.

The rollover IRA. When you leave a job, rolling an old 401(k) into an IRA is common — it consolidates accounts and usually cuts fees. Just remember the two cautions from elsewhere in this book: rolling to an IRA can forfeit the Rule of 55 (Chapter 25), and a large pre-tax IRA balance can complicate a future backdoor Roth via the pro-rata rule (Chapter 3). Roll with intent, not by reflex.

For the self-employed: the SEP-IRA and SIMPLE IRA

Two IRA-based plans for business owners. Beyond the personal IRA above, the tax code offers two employer-style IRAs for the self-employed and small businesses. They round out the menu alongside the Solo 401(k) from Chapter 1 once you have self-employment income.

The SEP-IRA — simple and high-capacity. A Simplified Employee Pension is the easiest big-contribution plan to run. It's funded entirely by the employer (you), with a contribution of up to 25% of compensation — about 20% of net self-employment income for a sole proprietor — capped at $72,000 in 2026. There's almost no paperwork: no annual Form 5500, and you can open and fund it as late as your tax-filing deadline, extensions included — which makes it a popular last-minute move at tax time. The tradeoffs: there's no employee deferral and no catch-up, so at a given income it shelters less than a Solo 401(k); and if you have employees, you must contribute the same percentage of pay for every eligible one, which gets expensive fast — so the SEP shines mainly for solo operators. (Roth SEPs are newly permitted under SECURE 2.0, though not every provider offers them yet.)

The SIMPLE IRA — for a small business with staff. A Savings Incentive Match Plan for Employees suits a small business (up to 100 employees) that wants to let workers defer their own pay. Employees can defer up to $17,000 in 2026, plus a $4,000 catch-up at 50+ (or $5,250 at 60–63), and the employer must either match up to 3% of pay or contribute a flat 2% for everyone. The limits sit below the SEP and Solo 401(k), and one trap stands out: money withdrawn within the first two years of participating faces a 25% early-withdrawal penalty — steeper than the usual 10%.

Which one? For a solo earner chasing the biggest deduction, the Solo 401(k) usually wins — its employee deferral shelters more, and it adds a Roth option. The SEP-IRA is the pick when you value zero paperwork over the last few thousand dollars of contribution room. The SIMPLE IRA fits a genuine small business with a handful of employees.