What a Traditional IRA Is

A traditional IRA is a retirement savings account where you can put money in before you pay income tax on it. The money grows without being taxed each year. When you take it out in retirement, that is when you pay income tax on what you withdraw. The account itself is just a container—you decide what investments go inside it, whether that is stocks, bonds, mutual funds, or cash.

The word "traditional" exists because it is the older type of IRA. It has been around since 1974. The Roth IRA came later and works differently, which is why the comparison matters. Both are individual retirement accounts, meaning you open one in your own name, not through an employer.

Key Takeaways

  • You may deduct what you contribute to a traditional IRA from your income taxes in the year you contribute, lowering your tax bill that year.
  • The money inside grows without being taxed until you withdraw it, at which point you pay income tax on the full amount you take out.
  • You must start taking withdrawals at age 73, and the IRS calculates the minimum amount you must take each year.
  • A traditional IRA makes the most sense if you expect to be in a lower tax bracket in retirement than you are now.
  • You can contribute up to $7,000 per year if you are under 50, or $8,000 if you are 50 or older, though your income may limit whether you can deduct the full amount.

How the Tax Deduction Works

When you put money into a traditional IRA, you may be able to deduct that amount from your taxable income for that year. If you earn $60,000 and contribute $7,000 to a traditional IRA, your taxable income drops to $53,000. You pay income tax only on the $53,000, not the full $60,000. This lowers your tax bill immediately.

The deduction is not automatic for everyone. If you or your spouse have a retirement plan through work—such as a 401(k) or pension—your income determines whether you can deduct the full amount, a partial amount, or nothing. The IRS publishes income limits each year, and they differ depending on your filing status and whether you have workplace coverage. If you have no workplace retirement plan, you can usually deduct the full contribution no matter your income.

You do not have to deduct your contribution. You can put money in a traditional IRA and choose not to deduct it, though this is rarely the right choice. If you do not deduct it, you will pay tax twice on that money—once when you earn it and again when you withdraw it.

How Taxes Work When You Withdraw

The money you contributed, plus all the growth it earned, sits in the account untouched. Every year it grows—through dividends, interest, or investment gains—and none of that growth is taxed while it sits there. This is the main advantage of a traditional IRA: your money compounds without the IRS taking a cut each year.

When you withdraw money in retirement, you pay income tax on the entire amount you take out. If you contributed $100,000 over the years and it grew to $250,000, you pay income tax on whatever you withdraw—whether that is $10,000 or $50,000. The tax rate you pay depends on your tax bracket that year, which usually is lower in retirement than it was while you were working. That is the bet you are making: you deduct the contribution when your income is high, and you pay tax on the withdrawal when your income is low.

If you contributed money without deducting it (called a non-deductible contribution), you do not pay tax on that portion again. The IRS tracks this using Form 8606, and you report it when you file your taxes.

Required Withdrawals Starting at Age 73

You cannot leave the money in a traditional IRA forever. Starting at age 73, you must take out a minimum amount each year, whether you need the money or not. The IRS calls this a required minimum distribution, or RMD. The amount is calculated by dividing your account balance by a life expectancy factor the IRS publishes. The older you are, the larger the percentage you must withdraw.

If you do not take out the required amount, the IRS charges a penalty—currently 25 percent of the shortfall, though this can be reduced to 10 percent if you correct it quickly. This is one of the strictest rules in retirement savings. You must take the withdrawal even if you do not want the money, even if you do not need it, and even if you would rather let it keep growing.

There is one exception: if you are still working and do not own more than 5 percent of the company you work for, you may be able to delay RMDs from that employer's plan. This does not apply to IRAs you opened on your own.

Contribution Limits and Age Rules

For 2024, you can contribute up to $7,000 per year to a traditional IRA if you are under age 50. If you are 50 or older, you can contribute an extra $1,000 as a "catch-up" contribution, for a total of $8,000. These limits change each year, and the IRS announces the new amount in October for the following year.

You can only contribute money you actually earned that year. If you earned $5,000 in income, you cannot contribute $7,000. You must have earned at least as much as you contribute. If you are married and one spouse does not work, the working spouse can contribute to an IRA for the non-working spouse, but the same rule applies: the contribution cannot exceed the household earned income.

You can open and contribute to a traditional IRA at any age, as long as you have earned income. There is no age limit for contributions, though the deduction rules change if you have a workplace retirement plan.

Who Benefits Most From a Traditional IRA

A traditional IRA makes the most sense if you expect your tax bracket to be lower in retirement than it is now. If you are earning $80,000 today and will live on $40,000 in retirement, the deduction saves you taxes at your current high rate, and you pay taxes at your future low rate. You come out ahead.

It also works well if you want to lower your taxable income this year for a specific reason—perhaps to stay under an income threshold for a tax credit, to reduce Medicare premiums, or to avoid a higher tax bracket. The deduction is immediate and real.

A traditional IRA is less attractive if you expect to be in the same tax bracket or a higher one in retirement. If you are young, earning little now, and expect to earn much more later, a Roth IRA usually makes more sense because you pay tax now at a low rate and avoid it later at a high rate. The choice depends on your personal situation, not on which account is "better" in general.

How to Open and Fund a Traditional IRA

You open a traditional IRA at a bank, credit union, brokerage firm, or investment company. The process is straightforward: you fill out an application with your name, Social Security number, address, and employment information. Most places let you do this online in a few minutes. There is no cost to open the account.

Once the account is open, you fund it by transferring money from your checking or savings account, or by rolling over money from another retirement account. You can contribute at any time during the year, but you have until the tax filing deadline—usually April 15 of the following year—to make a contribution and deduct it on that year's tax return. If you file an extension, you still have until April 15 to contribute; the extension only delays your tax filing, not your contribution deadline.

After you contribute, you choose what to invest in. Some people keep the money in a savings account or money market fund inside the IRA. Others buy stocks, bonds, or mutual funds. The IRA is just the account structure; the investments are your choice. You can change your investments whenever you want without penalty.

Frequently Asked Questions

Can I have both a traditional IRA and a Roth IRA?

Yes. You can open both accounts and contribute to both in the same year. However, your total contributions to all IRAs combined cannot exceed the annual limit—$7,000 for those under 50, or $8,000 for those 50 and older. If you contribute $4,000 to a traditional IRA, you can contribute only $3,000 to a Roth that year.

What happens if I withdraw money before retirement?

You pay income tax on the amount you withdraw, plus a 10 percent penalty if you are under age 59½. There are a few exceptions—you can withdraw without penalty for a first home purchase (up to $10,000 lifetime), certain medical expenses, or disability—but in most cases, early withdrawal is expensive. This is why an IRA is meant for retirement, not emergency savings.

Can I deduct my contribution if I have a 401(k) at work?

It depends on your income. If you have a workplace 401(k), your ability to deduct a traditional IRA contribution phases out at higher income levels. For 2024, the phase-out range for single filers is $77,000 to $87,000, but this changes each year. You can still contribute to the IRA; you just may not be able to deduct it.

What is the difference between a traditional IRA and a 401(k)?

A 401(k) is offered through your employer, while an IRA is opened on your own. A 401(k) usually has higher contribution limits and may include employer matching. An IRA gives you more control over investments. Both are tax-deferred accounts, but they have different rules for withdrawals and required distributions.

Do I have to take my required minimum distribution all at once?

No. You can take the required amount in one withdrawal or spread it across multiple withdrawals throughout the year, as long as the total meets the minimum. Some people take monthly withdrawals; others take one lump sum. The IRS only cares that you withdraw the full required amount by December 31.