A Traditional IRA is a retirement savings account where you can deduct contributions from your taxes now and pay taxes later when you withdraw the money

A Traditional IRA (Individual Retirement Account) is a bank or investment account you open yourself—not through an employer. You put money in, get a tax break on your tax return that year, and the money grows without being taxed each year. When you turn 59½ and start taking money out, that's when you pay income tax on what you withdraw.

The core trade-off is straightforward: you reduce your taxes today in exchange for paying taxes on a larger amount later. This works well if you expect to be in a lower tax bracket after you retire than you are now—which is true for many people, since they earn less in retirement.

You can open a Traditional IRA at a bank, credit union, brokerage firm, or online investment platform. There is no process process in the way a loan has one; you fill out an account form, fund it, and you're done. The account itself is just a container—you decide what goes inside it (savings, stocks, bonds, mutual funds, depending on where you open it).

Key Takeaways

  • You can deduct your Traditional IRA contributions from your income on your tax return the year you make them, which lowers the taxes you owe that year.
  • The money inside grows without being taxed each year, but you pay income tax on everything you withdraw after age 59½.
  • You must start taking withdrawals at age 73 (as of 2023), whether you need the money or not, and the IRS calculates the minimum amount.
  • If you withdraw money before age 59½, you usually pay income tax plus a 10% penalty, though some exceptions exist for hardship.
  • There are income limits for the tax deduction if you or your spouse have access to a workplace retirement plan like a 401(k).

How the tax deduction works

When you contribute money to a Traditional IRA, you can subtract that amount from your income on your tax return. If you earned $50,000 and contributed $6,500 to a Traditional IRA, you report $43,500 as your taxable income instead. This lowers the taxes you owe that year.

The catch: this deduction is only available if you meet certain conditions. If you have access to a workplace retirement plan (like a 401(k) or 403(b)), the deduction phases out as your income rises. The income limits change each year. If you don't have access to a workplace plan, you can always deduct your full contribution, no matter how much you earn.

Your spouse's workplace plan also matters. If your spouse has a 401(k) and you don't, you may lose some or all of your deduction depending on your household income. The IRS publishes the exact limits each year on their website.

What happens to your money while it sits in the account

Once the money is in the account, it grows tax-free. If you invest in stocks that go up in value, you don't pay capital gains tax that year. If you own bonds that pay interest, you don't pay tax on that interest. This compounding—earning returns on your returns—is one of the main reasons people use retirement accounts at all.

You control what the money is invested in. At a bank, it might sit in a savings account or CD earning a small amount of interest. At a brokerage, you might buy individual stocks, mutual funds, or exchange-traded funds (ETFs). The account type doesn't change; what changes is what's inside it.

Withdrawals after age 59½

Once you turn 59½, you can withdraw money from your Traditional IRA without the 10% early withdrawal penalty. You will still owe income tax on the withdrawal—that's the whole point of the deduction you took years earlier. If you contributed $6,500 and it grew to $15,000, you pay income tax on the full $15,000 when you withdraw it.

You don't have to withdraw anything at 59½. You can leave the money in the account as long as you want, and it keeps growing tax-free. However, at age 73, the IRS requires you to start taking withdrawals whether you need the money or not. These are called required minimum distributions (RMDs). The IRS calculates the amount based on your age and account balance, and you must withdraw at least that much each year or face a penalty.

Early withdrawals and the 10% penalty

If you withdraw money before age 59½, you pay income tax on the withdrawal plus a 10% penalty on top of it. This makes early withdrawal expensive. If you withdraw $10,000 at age 45 and you're in the 22% tax bracket, you owe $2,200 in income tax plus $1,000 in penalty—$3,200 total, leaving you $6,800 of your original $10,000.

There are exceptions to this penalty, though not many. You can withdraw without penalty if you're disabled, if you're a first-time homebuyer (up to $10,000 lifetime), if you have large medical expenses, or if you're unemployed and using it for health insurance premiums. The IRS also allows penalty-free withdrawals for education expenses and a few other narrow situations. Owing the income tax is unavoidable in most cases, but the 10% penalty can sometimes be waived.

Contribution limits and who can open one

For 2024, you can contribute up to $7,000 per year to a Traditional IRA (or $8,000 if you're age 50 or older). This is a combined limit across all IRAs you own—if you have two IRAs, the $7,000 total is split between them, not $7,000 each.

You can open a Traditional IRA as long as you have earned income from work that year. You don't need a job with a company; self-employment income counts. You can't contribute more than you earned. If you made $3,000 that year, you can contribute up to $3,000, not the full $7,000 limit.

There's no age limit to open one or contribute, as long as you have earned income. You can open a Traditional IRA at 70, 80, or any age and still contribute—though you can't make contributions after you turn 73½ (the year you must start taking required minimum distributions).

Traditional IRA vs. other retirement accounts

A Roth IRA is the main alternative. With a Roth, you don't get a tax deduction when you contribute, but the money grows tax-free and you pay no tax on withdrawals after age 59½. Roth makes sense if you expect to be in a higher tax bracket in retirement, or if you want tax-free withdrawals later. Roth has income limits that phase out the ability to contribute if you earn above a certain amount.

If your employer offers a 401(k) or 403(b), those are workplace plans with much higher contribution limits (up to $23,500 in 2024). Many employers also match a portion of what you contribute. A Traditional IRA is useful if you don't have access to a workplace plan, or if you've maxed out your workplace plan and want to save more.

A SEP IRA or Solo 401(k) are options if you're self-employed and want to save more than a regular IRA allows. These have higher contribution limits designed for business owners.

Frequently Asked Questions

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

Yes, you can own both at the same time. However, your annual contribution limit is shared between them. 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 can't contribute the full amount to each one.

What happens to my Traditional IRA if I die?

Your beneficiary (whoever you named on the account) inherits it. They can roll it into their own IRA or take the money out. The rules for inherited IRAs changed in 2023, and most non-spouse beneficiaries must now withdraw the entire account within 10 years. Talk to the financial institution holding the account about naming a beneficiary.

Can I move money from a 401(k) into a Traditional IRA?

Yes, this is called a rollover. When you leave a job, you can roll your 401(k) balance into a Traditional IRA without paying taxes or penalties, as long as you do it correctly. The money must go directly from the 401(k) plan to the IRA (a "direct rollover"), or you have 60 days to deposit it yourself. Ask your 401(k) plan administrator how to do this.

Do I have to take required minimum distributions if I'm still working?

Usually yes, but there's an exception. If you're still employed and you don't own more than 5% of the company, you can delay RMDs from your current employer's 401(k) until you actually retire. This doesn't explore to IRAs—RMDs from a Traditional IRA start at age 73 regardless of whether you're working.

What if I made a mistake on my contribution and contributed too much?

Contact the financial institution holding the account and ask them to remove the excess contribution. If you catch it before you file your taxes that year, you can usually fix it without penalty. If you don't catch it, you may owe a 6% penalty on the excess amount each year it sits in the account. It's worth fixing as soon as you notice.