Traditional IRA

A traditional IRA (Individual Retirement Account) is a personal retirement account in which you contribute pre-tax income, reduce your taxable income for the year, and allow the account to grow tax-deferred until you withdraw it in retirement.

How it works

You open a traditional IRA (usually at a bank or brokerage), then contribute up to $7,000 per year (2024; $8,000 if 50+). This contribution is deductible on your tax return, reducing your taxable income. The money grows, tax-free, while in the account. When you withdraw in retirement, you pay ordinary income taxes on the withdrawn amount.

For example: if you earn $60,000 and contribute $7,000 to a traditional IRA, your taxable income drops to $53,000. If your marginal tax rate is 22%, you save $1,540 in taxes. The $7,000 is now invested, growing tax-deferred.

Deductibility limits

The tax deduction for a traditional IRA contribution depends on whether you have access to an employer retirement plan (like a 401(k)) and your modified adjusted gross income (MAGI).

If you do not have access to a 401(k): Your entire IRA contribution is deductible, regardless of income.

If you have access to a 401(k): Your deduction phases out as your income rises. For 2024, single filers start losing the deduction at $77,000 MAGI and lose it entirely at $87,000. Married filing jointly start at $123,000 and lose it at $143,000.

If you earn above the phase-out range and have a 401(k), you can still contribute to an IRA, but the contribution is not deductible. This sets up the possibility of a backdoor Roth conversion.

Investment options

Like a 401(k), an IRA holds investments you choose: index funds, mutual funds, stocks, bonds, or other assets. Your brokerage offers a menu of options. You decide the allocation.

Withdrawal rules

You can withdraw your traditional IRA starting at age 59½ without penalty. Withdrawals before 59½ trigger a 10% early-withdrawal penalty plus ordinary income taxes, though some exceptions apply (education expenses, first-time home purchase, disability).

You must begin taking required minimum distributions (RMDs) at age 73. These mandatory withdrawals eventually deplete the account.

Traditional vs. Roth

Traditional IRA:

• Deductible now, taxed in retirement
• Makes sense if you expect to be in a lower tax bracket in retirement, or if you are in a high bracket now and want the tax break.

Roth IRA:

• Not deductible now, tax-free in retirement
• Makes sense if you expect to be in a higher bracket in retirement, or if you want guaranteed tax-free growth.

Most people use both: max out a Roth, then fund a traditional IRA for additional savings.

Conversion to Roth

You can convert a traditional IRA to a Roth IRA, though you owe taxes on the converted amount in that year. This is useful if you expect to be in a lower bracket that year, or if you want to lock in current tax rates. See Roth conversion for details.

See also