Ways to Fund an IRA

Opening an Individual Retirement Account (IRA) is just the first step—to actually build retirement wealth, you need to get money into the account. While making regular contributions might seem like the only way to fund an IRA, there are actually several different methods for adding money to your retirement account, each with its own rules, benefits, and ideal use cases.

Understanding all your funding options is important because different life situations call for different strategies. If you're just starting your career, regular contributions from your paycheck make sense. If you're changing jobs, rolling over your old 401(k) might be the best move. If you have a traditional IRA with substantial savings, converting to a Roth IRA could provide long-term tax benefits. The method you use can significantly impact your taxes, contribution limits, and overall retirement strategy.

This comprehensive guide explores every way to fund an IRA, from straightforward annual contributions to more complex strategies like rollovers and conversions. We'll explain how each method works, the rules and limitations that apply, the tax implications, and when each approach makes sense. Whether you're funding your first IRA or looking to maximize your retirement savings through advanced strategies, you'll find the information you need to make informed decisions.

Method 1: Direct Annual Contributions

The most common way to fund an IRA is through direct contributions—money you transfer from your bank account or paycheck directly into your IRA. This is how most people build their retirement savings year after year.

How Direct Contributions Work

You can contribute cash to your IRA at any time during the year, or even after the year ends up until the tax filing deadline (typically April 15th of the following year). When you make a contribution, you specify which tax year it applies to. For example, a contribution made in March 2025 can be designated as either a 2024 or 2025 contribution, as long as you're still within the 2024 tax filing deadline.

Contribution Limits

The IRS sets annual limits on how much you can contribute to traditional and Roth IRAs combined. For 2024, the limit is $7,000 ($8,000 if you're 50 or older). These limits typically increase every few years to account for inflation. Your total contributions to all traditional and Roth IRAs cannot exceed this limit—it's not per account, but across all your IRAs.

You can only contribute up to 100% of your earned income, whichever is less. If you earned $5,000 in a year, your maximum contribution is $5,000 even though the general limit is $7,000.

Types of Direct Contributions

Traditional IRA Contributions: May be tax-deductible depending on your income and whether you're covered by an employer retirement plan. Deductible contributions reduce your taxable income in the year you make them, providing immediate tax savings.

Roth IRA Contributions: Made with after-tax money (no deduction), but qualified withdrawals in retirement are tax-free. Roth contributions have income limits—high earners cannot contribute directly to a Roth IRA, though the backdoor Roth strategy remains available.

Non-Deductible Traditional IRA Contributions: If your income is too high to deduct traditional IRA contributions, you can still make non-deductible contributions. You must file Form 8606 to track your basis (the amount you've already paid taxes on).

Methods for Making Direct Contributions

Electronic Bank Transfer (ACH): The most common method. Link your bank account to your IRA and initiate transfers online. Transfers typically process within 1-3 business days. Most providers don't charge for ACH transfers.

Automatic Monthly Contributions: Set up recurring transfers from your bank account. This enforces saving discipline and leverages dollar-cost averaging. You can start, stop, or adjust automatic contributions at any time.

Check by Mail: Write a check payable to your IRA custodian with your account number. This is the slowest method, taking 5-10 business days to process.

Wire Transfer: The fastest method but may incur fees ($15-$30). Useful if you're making a large contribution near a deadline.

Mobile Check Deposit: Some providers allow you to deposit contribution checks using their mobile app, similar to depositing checks at a bank.

Timing Strategies for Contributions

Lump Sum at the Beginning of the Year: Maximizes time in the market. If you contribute $7,000 on January 1st versus December 31st, that money has an extra year to grow. Historical data suggests lump-sum investing at the start of the year typically outperforms spreading contributions throughout the year.

Dollar-Cost Averaging Throughout the Year: Reduces the risk of contributing a large sum right before a market drop. Monthly contributions of about $583 ($7,000 ÷ 12) spread your investment across different market prices, potentially lowering your average cost per share.

Tax-Deadline Contributions: Making contributions between January and mid-April for the previous tax year allows you to see your actual income and tax situation before deciding how much to contribute and whether to use a traditional or Roth IRA.

When Direct Contributions Make Sense

Direct contributions are ideal for:

People in the workforce with earned income
Building retirement savings consistently year after year
Those who don't have old 401(k)s or other retirement accounts to roll over
Anyone wanting to establish a regular saving habit
Young workers starting their retirement savings journey

Method 2: Spousal IRA Contributions

Spousal IRAs allow a working spouse to contribute to an IRA for a non-working or low-earning spouse, effectively doubling a household's annual IRA contributions.

How Spousal IRAs Work

If you're married filing jointly, the working spouse can contribute up to the annual limit to their own IRA and up to the annual limit to a spousal IRA, as long as the couple's combined earned income equals or exceeds the total contributions. The spousal IRA is owned by the non-working spouse—it's their account, not a joint account.

For example, if one spouse earns $80,000 and the other has no income, the working spouse can contribute $7,000 to their own IRA and $7,000 to a spousal IRA for their partner, for a total household contribution of $14,000 (or $16,000 if both are 50 or older).

Requirements for Spousal IRA Contributions

You must be legally married
You must file a joint tax return
The working spouse must have earned income at least equal to the total IRA contributions for both spouses
The non-working spouse can have some earned income, as long as it's less than the contribution amount

Traditional vs. Roth Spousal IRA

Spousal IRAs can be either traditional or Roth, and each spouse can choose independently. One spouse might contribute to a traditional IRA while the other contributes to a Roth IRA based on their individual tax strategies and circumstances. The same income limits and deductibility rules apply to spousal IRAs as to regular IRAs.

When Spousal IRAs Make Sense

Spousal IRAs are ideal for:

Couples where one spouse stays home to care for children or elderly parents
Situations where one spouse works part-time or has minimal income
Maximizing household retirement savings despite unequal incomes
Ensuring both spouses build retirement assets in their own names

Method 3: Rollover from Employer-Sponsored Plans (401(k), 403(b), etc.)

When you leave a job, you can roll over your employer-sponsored retirement plan (401(k), 403(b), 457, TSP, etc.) into an IRA. This is one of the most common ways people significantly increase their IRA balances.

How Rollovers Work

A rollover moves money from one retirement account to another without triggering taxes or penalties (when done correctly). You're not making a contribution in the traditional sense, so rollovers don't count toward your annual contribution limits. You could roll over $200,000 from your 401(k) to an IRA and still make your regular $7,000 annual contribution.

Types of Rollovers

Direct Rollover (Trustee-to-Trustee Transfer): Your 401(k) provider sends the money directly to your IRA custodian. This is the safest, simplest method. Nothing is withheld for taxes, you don't risk missing deadlines, and there's no limit on how many direct rollovers you can do.

Indirect Rollover (60-Day Rollover): You receive a check from your 401(k) provider and have 60 days to deposit it into an IRA. This method is risky because:

Your employer will withhold 20% for taxes, which you'll need to replace from other funds if you want to roll over the full amount
If you miss the 60-day deadline, the entire amount becomes taxable (plus potential penalties)
You can only do one IRA-to-IRA indirect rollover per 12-month period (though this doesn't apply to 401(k)-to-IRA rollovers)

Always choose a direct rollover when possible.

What You Can Roll Over

You can roll over funds from:

401(k), 403(b), and 457 plans
Thrift Savings Plan (TSP) for federal employees
SIMPLE IRAs (after 2 years of participation)
SEP IRAs
Other traditional IRAs
Pension plans and defined benefit plans

Pre-Tax to Traditional, Roth to Roth

Pre-tax money (traditional 401(k) contributions) should be rolled to a traditional IRA to avoid taxes. Roth 401(k) money should be rolled to a Roth IRA. However, you can roll pre-tax money into a Roth IRA (called a "Roth conversion"), but you'll owe income tax on the converted amount.

Steps to Roll Over Your 401(k)

Open an IRA if you don't have one already (or decide which existing IRA to use)
Contact your 401(k) provider and request a direct rollover to your IRA. They'll provide paperwork or an online process.
Provide your IRA account information to your 401(k) provider (account number, custodian name and address)
Choose your rollover type: Specify whether it's going to a traditional IRA or Roth IRA
Submit the request. Processing typically takes 2-4 weeks
Monitor the transfer. Verify when the funds leave your 401(k) and when they arrive in your IRA
Invest the funds. Money often arrives as cash in your IRA settlement account, so you'll need to select investments

Should You Keep Your 401(k) or Roll It Over?

You typically have four options when leaving a job:

Leave it in your old employer's plan: Possible if your balance exceeds $5,000. Consider this if your 401(k) has excellent, low-cost investment options or unique benefits.

Roll it to your new employer's 401(k): Good if your new plan has strong investment options and you want everything in one place. Also useful if you're planning backdoor Roth conversions (to avoid the pro-rata rule).

Roll it to an IRA: Usually the best option for most people. IRAs typically offer more investment choices, lower fees, and greater flexibility than 401(k)s.

Cash it out: Generally a terrible idea. You'll owe income tax plus a 10% penalty if you're under 59½, and you'll lose decades of potential growth.

When 401(k) Rollovers Make Sense

Rolling your 401(k) to an IRA makes sense when:

You're changing jobs or retiring
Your 401(k) has high fees or poor investment options
You want more investment flexibility
You prefer to consolidate accounts for easier management
Your former employer is charging maintenance fees on former employees' accounts

Method 4: IRA-to-IRA Transfers

If you already have an IRA at one provider and want to move it to another, you can use an IRA-to-IRA transfer (also called a trustee-to-trustee transfer).

How IRA-to-IRA Transfers Work

The money moves directly from one IRA custodian to another without you ever touching the funds. You won't receive any money, and nothing is withheld for taxes. These transfers are not reportable events—you won't receive a 1099-R, and the transfer doesn't count toward any rollover limits.

Steps for an IRA Transfer

Open an IRA at your new provider (same type—traditional to traditional, Roth to Roth)
Initiate the transfer with your new provider. They'll provide a transfer form
Provide information about your old IRA (account number, custodian name, approximate balance)
Submit the transfer request. Your new custodian will contact your old custodian
Wait for processing, typically 1-3 weeks
Verify the transfer completed and close your old account if desired

Transfer vs. Rollover: What's the Difference?

The terms are often used interchangeably, but technically:

Transfer: Moving money between like accounts (IRA to IRA, 401(k) to 401(k)). No limit on frequency, not reportable to the IRS
Rollover: Moving money from one type of retirement account to another (401(k) to IRA). Subject to certain limitations and reporting requirements

When IRA Transfers Make Sense

Transfer your IRA when:

Your current provider has high fees
You want better investment options
You're consolidating multiple IRAs for easier management
You're unhappy with customer service at your current provider
You want access to better technology or mobile apps

Method 5: Roth Conversions

A Roth conversion moves money from a traditional IRA (or other pre-tax retirement account) to a Roth IRA. You pay taxes on the converted amount now in exchange for tax-free withdrawals later.

How Roth Conversions Work

You can convert any amount from a traditional IRA to a Roth IRA at any time—there are no income limits or annual caps on conversions (though you'll owe tax on the converted amount). The conversion counts as taxable income in the year you convert, but after that, the money grows tax-free and can be withdrawn tax-free in retirement.

Why Convert to a Roth IRA?

Pay taxes now at known rates: If you believe tax rates will rise in the future (or you'll be in a higher bracket in retirement), paying taxes now locks in today's rates.

Tax-free growth: After conversion, all future growth is tax-free rather than tax-deferred.

No required minimum distributions: Unlike traditional IRAs, Roth IRAs have no RMDs during your lifetime, giving you more control over your money.

Tax diversification: Having both pre-tax and after-tax retirement accounts gives you flexibility to manage taxes in retirement.

Estate planning benefits: Roth IRAs are valuable assets to leave to heirs because they inherit them tax-free.

Strategic Timing for Roth Conversions

Low-income years: If you have a year with unusually low income (between jobs, sabbatical, early retirement), your tax rate might be lower, making it an ideal time to convert.

Market downturns: If your traditional IRA has declined in value, you can convert more shares for less tax. When the market recovers, that growth happens in your Roth IRA tax-free.

Before RMDs begin: Converting before age 73 reduces your traditional IRA balance, which reduces future RMDs.

Gradually over multiple years: Converting smaller amounts annually can keep you in lower tax brackets rather than triggering a huge tax bill in one year.

The Tax Bill

The converted amount is added to your taxable income for the year. If you convert $50,000 and you're in the 22% tax bracket, you'll owe approximately $11,000 in federal income tax (plus state tax if applicable). You'll need to pay this from sources outside the IRA—if you withhold the taxes from the conversion itself, that withheld amount is treated as a distribution subject to penalties if you're under 59½.

Backdoor Roth IRA Strategy

High earners who exceed Roth IRA income limits can use the "backdoor Roth" strategy:

Make a non-deductible contribution to a traditional IRA (no income limits)
Immediately convert it to a Roth IRA
Pay tax only on any earnings between contribution and conversion (usually minimal if done quickly)

This strategy works best if you don't have other traditional IRA balances due to the pro-rata rule, which requires you to calculate taxes based on the ratio of pre-tax to after-tax money across all your traditional IRAs.

When Roth Conversions Make Sense

Consider Roth conversions when:

You're in a low tax bracket now but expect higher rates in retirement
You have a low-income year
The market has declined and your IRA balance is lower
You want to reduce future RMDs
You have cash available to pay the conversion tax without touching retirement funds
You want to leave tax-free assets to heirs
You're a high earner using the backdoor Roth strategy

Method 6: Employer Contributions (SEP and SIMPLE IRAs)

If you're self-employed or own a small business, you can fund an IRA through special employer contribution programs.

SEP IRA Contributions

A Simplified Employee Pension (SEP) IRA allows employers to contribute up to 25% of an employee's compensation or $66,000 (2023), whichever is less. For self-employed individuals, the calculation is slightly more complex because you must account for self-employment taxes.

SEP IRAs are ideal for self-employed individuals and small business owners who want to save significantly more than traditional IRA limits allow. Contributions are tax-deductible, and employees cannot contribute—only the employer makes contributions.

SIMPLE IRA Contributions

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is available to businesses with 100 or fewer employees. Unlike SEP IRAs, both employees and employers contribute:

Employees can defer up to $15,500 of their salary (2023), plus $3,500 catch-up if 50 or older
Employers must either match contributions dollar-for-dollar up to 3% of compensation, or make a 2% non-elective contribution for all eligible employees

When SEP and SIMPLE IRAs Make Sense

These specialized IRAs are ideal for:

Self-employed individuals and freelancers
Small business owners
Anyone wanting to contribute more than traditional IRA limits allow
Businesses wanting simple retirement plans without the complexity of 401(k)s

Method 7: Inheritances and Transfers from Deceased Account Owners

If you inherit an IRA from someone other than your spouse, you typically cannot add the inherited funds to your own IRA. Instead, the inherited funds go into a special inherited IRA (also called a beneficiary IRA) in your name.

Spousal Inheritance

Surviving spouses have unique options. They can:

Treat the inherited IRA as their own (most common choice)
Roll it over to their own existing IRA
Keep it as an inherited IRA

Treating it as your own (or rolling it over) essentially funds your IRA with your deceased spouse's retirement savings, allowing you to continue growing the assets under your own name.

Non-Spousal Inheritance

Non-spouse beneficiaries generally cannot move inherited IRA funds into their own IRAs. The SECURE Act (2019) requires most non-spouse beneficiaries to withdraw all funds within 10 years of the original owner's death, though certain eligible designated beneficiaries (surviving spouses, minor children, disabled individuals, and those not more than 10 years younger than the deceased) have more flexibility.

Method 8: Repayment of Qualified Disaster Distributions

If you took a qualified disaster distribution from your IRA (available after certain federally declared disasters), you can repay the distribution to your IRA within three years. This repayment doesn't count toward your annual contribution limits, essentially allowing you to put the money back as if you never took it out.

Method 9: Returned Excess Contributions

If you overcontributed to your IRA, you can remove the excess (plus any earnings) by the tax filing deadline to avoid penalties. If you later have contribution room available, you can return that money to your IRA, though this is uncommon and subject to specific rules.

Combining Multiple Funding Methods

You can use multiple funding methods in the same year to maximize your IRA balances:

Make your regular $7,000 annual contribution AND roll over a 401(k) from an old employer
Make annual contributions AND convert traditional IRA funds to a Roth IRA
Make spousal IRA contributions for both spouses AND roll over employer plans

The key is understanding that rollovers, transfers, and conversions don't count toward your annual contribution limits—only new money coming from your current income counts toward the $7,000 annual limit.

Which Funding Method Should You Use?

The best funding method depends on your situation:

If you're employed with earned income: Make regular annual contributions, ideally automated monthly

If you're changing jobs: Roll over your 401(k) to an IRA for better investment options and lower fees

If you're married with one working spouse: Use spousal IRA contributions to double your household's retirement savings

If you're self-employed: Consider a SEP IRA for much higher contribution limits

If you have a traditional IRA and expect higher future tax rates: Consider Roth conversions, especially during low-income years

If you're unhappy with your current IRA provider: Transfer your IRA to a provider with better fees and investment options

If you exceed Roth IRA income limits: Use the backdoor Roth strategy to fund a Roth IRA indirectly

Common Funding Mistakes to Avoid

Contributing More Than Allowed

Excess contributions are subject to a 6% penalty each year they remain in your account. Track your contributions carefully, especially if you have multiple IRAs.

Choosing Indirect Rollovers

Indirect rollovers are risky due to the 60-day deadline and 20% withholding. Always use direct rollovers when moving retirement money.

Not Understanding the Pro-Rata Rule

If you have both pre-tax and after-tax money in traditional IRAs, you can't simply choose which portion to convert or withdraw. The pro-rata rule requires proportional treatment based on your total IRA balances.

Forgetting to Invest

Contributing money to your IRA is only half the job—you must actually invest it. Money sitting in a settlement account earns virtually nothing.

Missing Deadlines

Annual contributions can be made until the tax filing deadline, but Roth conversions must be completed by December 31st. Missing these deadlines can cost you opportunities.

Conclusion

Funding your IRA isn't limited to making annual contributions from your paycheck. Rollovers, transfers, conversions, spousal contributions, and employer contributions all provide ways to build your retirement savings. Understanding these various methods allows you to take advantage of opportunities to increase your IRA balance, reduce taxes, and optimize your retirement strategy.

The most successful retirement savers use multiple funding methods throughout their working years—making consistent annual contributions, rolling over 401(k)s when changing jobs, strategically converting to Roth IRAs during low-income years, and taking advantage of special programs like SEP IRAs if self-employed. By understanding all your options and using them strategically, you can maximize your retirement savings and build the financial security you deserve.

Remember, the earlier you start funding your IRA and the more consistently you contribute, the more time your money has to grow through compound interest. Whether you're just starting out with modest monthly contributions or executing sophisticated Roth conversion strategies, every dollar you add to your IRA is a step toward a more secure retirement.