What a Traditional IRA Is

A traditional IRA is a retirement savings account where you can set aside money before taxes are taken out of your paycheck. The money grows tax-free inside the account, and you do not pay taxes on those earnings until you withdraw the money in retirement. The account itself is set up through a bank, brokerage firm, or other financial institution — not through your employer.

The main appeal is the tax break now: if you meet income limits, you can deduct your contributions from your taxable income in the year you make them, which lowers the taxes you owe that year. Later, when you take money out after age 59½, you pay income tax on the full amount you withdraw — both what you put in and what it earned.

This is different from a Roth IRA, where you contribute after-tax money but withdrawals in retirement are tax-free. It is also different from a 401(k), which is tied to your employer and often comes with matching contributions.

Key Takeaways

  • You can deduct your traditional IRA contributions from your taxes in the year you make them, but you pay income tax on withdrawals in retirement.
  • The money in the account grows without being taxed each year, which means compound growth works in your favor.
  • You can contribute up to $7,000 per year (or $8,000 if you are 50 or older), though the deduction phases out if your income is high enough.
  • You must start taking withdrawals at age 73, and withdrawals before age 59½ usually come with a 10 percent penalty plus income tax.
  • You can open a traditional IRA on your own, even if you do not have an employer retirement plan.

How Much You Can Contribute Each Year

The IRS sets an annual limit on how much you can put into a traditional IRA. For 2024, that limit is $7,000 per year if you are under 50, and $8,000 per year if you are 50 or older (the extra $1,000 is called a "catch-up" contribution). These limits change periodically, so check the IRS website or your financial institution for the current year's amount.

You can contribute as much or as little as you want up to that limit — there is no minimum. You can also contribute in a lump sum or spread contributions throughout the year. The deadline to contribute for a given tax year is usually April 15 of the following year (the tax filing deadline), though some financial institutions may have earlier cutoff dates.

The Tax Deduction and Income Limits

The tax deduction for a traditional IRA contribution is not automatic for everyone. If you or your spouse are covered by a retirement plan at work — such as a 401(k), 403(b), or pension — your ability to deduct the contribution phases out once your income reaches a certain level. For 2024, that phase-out range depends on your filing status and whether your spouse has a workplace plan.

If neither you nor your spouse has a workplace retirement plan, you can deduct the full contribution no matter how much you earn. If you do have a workplace plan, the IRS publishes the income ranges each year on its website. Once your income exceeds the upper limit of the range, you cannot deduct any of that year's contribution, though you can still contribute the money — it just goes in as after-tax dollars.

This is an important distinction: you can always contribute to a traditional IRA, but the tax deduction depends on your income and whether you have access to a workplace plan.

How the Money Grows Tax-Free

Once money is inside a traditional IRA, any earnings — whether from interest, dividends, or investment gains — are not taxed each year. This means your balance can grow faster than it would in a regular savings account or taxable investment account, where you would owe taxes on earnings annually.

You decide how to invest the money in the account. Most financial institutions offer options like stocks, bonds, mutual funds, and target-date funds (which automatically shift from aggressive to conservative as you approach retirement). Some people keep it simple with a low-cost index fund; others build a diversified portfolio. The growth compounds over time, meaning you earn returns on your returns.

The tax-free growth is one reason people use traditional IRAs for long-term retirement savings — the longer the money sits, the more time compound growth has to work.

When You Can Withdraw Money and What Happens

You can withdraw money from a traditional IRA at any time, but the tax and penalty consequences depend on your age. If you withdraw before age 59½, you owe income tax on the amount withdrawn plus a 10 percent early withdrawal penalty. There are some exceptions to the penalty — such as withdrawals for a first home purchase (up to $10,000 lifetime) or certain medical expenses — but the income tax still applies.

Once you reach age 59½, you can withdraw money without the penalty, though you still owe income tax on the full amount. At age 73, the IRS requires you to start taking withdrawals, called required minimum distributions (RMDs). The amount is calculated based on your age and account balance, and you must take it whether you need the money or not. If you do not take the required amount, you face a penalty.

The tax you owe on withdrawals is based on your tax bracket in the year you withdraw. If you withdraw a large amount in one year, it may push you into a higher tax bracket, so some people spread withdrawals across multiple years to manage their tax bill.

Opening and Managing a Traditional IRA

You can open a traditional IRA through most banks, credit unions, brokerages, and investment firms. The process is straightforward: you fill out paperwork (often online), provide your Social Security number and basic information, and choose how to invest the money. There is usually no minimum balance required to open the account, though some institutions may have minimums for certain investment types.

Once the account is open, you manage it yourself. You decide when to contribute, how to invest the money, and when to withdraw. You receive statements showing your balance and earnings. You are responsible for tracking your contributions for tax purposes — the financial institution will send you a form (Form 5498) each year showing what you contributed, but you need to keep your own records to know how much of your contributions were deductible.

If you have multiple IRAs, the contribution limit applies to all of them combined, not to each account separately. For example, if you have two traditional IRAs and contribute $4,000 to one and $3,000 to the other, you have used your full $7,000 limit for the year.

Traditional IRA vs. Other Retirement Accounts

A traditional IRA is one option among several for retirement savings. If your employer offers a 401(k) or similar plan, that often makes sense first because many employers match contributions (assistance programs). A traditional IRA is useful if you do not have access to a workplace plan, or if you have already maxed out your 401(k) and want to save more.

The main difference between a traditional IRA and a Roth IRA is timing: with a traditional IRA, you get the tax break now (deductible contributions) but pay taxes later (on withdrawals). With a Roth, you pay taxes now but get tax-free withdrawals later. Which makes more sense depends on whether you expect your tax bracket to be higher or lower in retirement.

A SEP IRA or Solo 401(k) is designed for self-employed people or small business owners and allows much higher contributions. A traditional IRA is simpler and available to anyone with earned income, regardless of employment status.

Frequently Asked Questions

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

Yes, you can have both, but your total contributions to all IRAs combined cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth that year (assuming the $7,000 limit). You would need to track contributions across both accounts to stay within the limit.

What happens to my traditional IRA if I die?

Your beneficiary (usually a spouse, child, or other heir you name) inherits the account. The rules for what they can do with it depend on their relationship to you and when they inherited it. A surviving spouse can roll it into their own IRA; other beneficiaries typically must withdraw the money over a set period and pay income tax on it.

Can I withdraw money to pay for education or medical bills?

You can withdraw money at any time, but before age 59½ you will owe income tax plus a 10 percent penalty on the amount. There are some exceptions: you can withdraw up to $35,000 lifetime for a first home, and certain medical and education expenses may may have access to for penalty-free withdrawal, though income tax still applies. Check with a tax professional about your specific situation.

What if I have a traditional IRA and then get a job with a 401(k)?

You can keep the traditional IRA and contribute to the 401(k) at the same time. However, if you contribute to the 401(k), your ability to deduct traditional IRA contributions may be limited based on your income. You can also roll the IRA into the 401(k) if the plan allows it, which simplifies things.

Do I need to report my traditional IRA on my tax return?

Yes. If you deducted contributions, you report them on your tax return. You also report any withdrawals. The financial institution sends you a Form 5498 (for contributions) and Form 1099-R (for withdrawals), which you use to complete your return. Even if you did not deduct contributions, you should report them to avoid being taxed twice.