Guide to Individual Retirement Account Types and Limits

Planning for retirement is one of the most critical financial goals, and understanding the right tools to achieve this is essential. A Traditional Retirement Account, also known as an Individual Retirement Account (IRA), is a popular option for securing your financial future. With tax advantages and flexible contribution options, IRAs have become a cornerstone of retirement planning. In this guide, we will explore the types of IRA accounts, contribution limits, tax rules, and comparisons with India’s National Pension System (NPS) to help you make informed decisions.

Published Feb 2, 2026 4 Min Read

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What is a Traditional Retirement Account (Individual Retirement Account)?

A Traditional Retirement Account, commonly referred to as an Individual Retirement Account (IRA), is a tax-advantaged savings tool designed to help individuals prepare for their retirement. With a Traditional IRA, you can contribute pre-tax income, which reduces your taxable income for the year. The funds in the account grow tax-deferred, meaning you do not pay taxes on the earnings until you withdraw them during retirement.

Key Features of a Traditional IRA:

Tax-deferred growth: Earnings in the account grow without being taxed annually, allowing your savings to compound faster.
Pre-tax contributions: Contributions are often tax-deductible, depending on your income and participation in other retirement plans.
Withdrawal rules: You can start withdrawing funds after the age of 59½, but withdrawals are subject to income tax. Early withdrawals may incur penalties.

Traditional IRAs are ideal for individuals looking to reduce their current tax liability while building a substantial retirement corpus.

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Contribution Limits & Tax Deductibility Rules

Understanding the contribution limits and tax deductibility rules is crucial for maximizing the benefits of a Traditional IRA.

Annual Contribution Limits

For the current financial year, the contribution limit for a Traditional IRA is Rs. 6,50,000 (approximately $8,000). Individuals aged 50 or older can contribute an additional Rs. 1,00,000 (catch-up contribution), bringing their total limit to Rs. 7,50,000.

Tax Deductibility Rules

The tax deductibility of contributions depends on your income and whether you or your spouse are covered by a workplace retirement plan.

Fully deductible contributions: If you are not covered by a workplace retirement plan, your contributions are fully tax-deductible regardless of your income.
Partial deductibility: If you are covered by a workplace plan, your deduction may be limited based on your income level.

Pro Tip:

To ensure you are taking full advantage of your IRA’s tax benefits, calculate your maximum contribution eligibility based on your income and age.

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Traditional IRA vs. India’s NPS: A Comparative Analysis

While Traditional IRAs are widely used in the United States, India’s National Pension System (NPS) is a comparable retirement savings tool. Let us compare the two to understand their unique features and benefits.

Key Differences Between Traditional IRA and NPS

Feature	Traditional IRA	India’s NPS
Eligibility	Available to individuals with earned income	Open to Indian citizens aged 18–65
Tax Benefits	Contributions may be tax-deductible	Contributions eligible for tax deductions under Section 80CCD of the Income Tax Act
Withdrawal Rules	Taxable withdrawals after age 59½	Partial withdrawals allowed after 3 years; taxable annuity income
Investment Options	Limited to mutual funds, stocks, and bonds	Offers equity, government securities, and corporate bonds
Mandatory Withdrawals	Required Minimum Distributions (RMDs) start at age 73	No mandatory withdrawals; annuity purchase is required at retirement

Why It Matters:

Choosing between a Traditional IRA and NPS depends on your financial goals, tax-saving requirements, and investment preferences. While IRAs offer flexibility and tax-deferred growth, NPS provides a structured retirement plan with additional tax benefits.

Frequently Asked Questions

What happens to an individual retirement account if I move to India?

If you move to India, your IRA remains intact, but managing it becomes subject to specific rules. Contributions may no longer be possible unless you have earned income in the United States. Withdrawals from the account are taxable under U.S. laws, and you may also need to report them in India under local tax regulations. It is recommended to consult a tax advisor to navigate dual taxation issues effectively.

Are all types of IRA accounts eligible for tax deductions?

No, not all IRA accounts are eligible for tax deductions. Traditional IRAs often allow tax-deductible contributions based on your income and participation in workplace retirement plans. On the other hand, Roth IRAs do not offer tax deductions for contributions, but they provide tax-free withdrawals.

Can I contribute to a traditional retirement account if I have no earned income?

No, contributions to a Traditional IRA require earned income. If you have no earned income, you cannot contribute directly to the account. However, spousal IRAs allow contributions based on your spouse’s earned income if you file taxes jointly.

How do different types of IRA accounts handle beneficiary transfers?

When an IRA account holder passes away, the funds are transferred to the designated beneficiary. For Traditional IRAs, beneficiaries must begin taking Required Minimum Distributions (RMDs) based on their life expectancy. Roth IRAs, however, do not require RMDs during the beneficiary’s lifetime, providing more flexibility.

Which types of IRA accounts do not require mandatory withdrawals (RMDs)?

Roth IRAs do not require mandatory withdrawals during the account holder’s lifetime. This feature makes Roth IRAs an attractive option for individuals who want their savings to grow tax-free indefinitely or pass on wealth to their heirs.

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