Traditional IRA
An individual retirement account funded with pre-tax or after-tax dollars, offering potential tax deductions now and tax-deferred growth until withdrawal.
A Traditional IRA (Individual Retirement Account) is a US retirement savings account that may offer a tax deduction on contributions and provides tax-deferred growth on investments — meaning taxes are not paid on gains until money is withdrawn in retirement. Created by the Employee Retirement Income Security Act (ERISA) of 1974, it was the original form of individual retirement savings before the Roth IRA was introduced in 1997.
Contribution limits for 2024: $7,000 per year ($8,000 if age 50+), shared across all IRAs (traditional + Roth combined). Anyone with earned income can contribute, but the deductibility of contributions depends on income and whether the contributor (or spouse) is covered by a workplace retirement plan.
If covered by a workplace plan (401k, 403b), deductibility phases out for single filers with MAGI between $77,000–$87,000 (2024) and married filing jointly between $123,000–$143,000. Above these thresholds, contributions are non-deductible but still made with after-tax dollars (tracking basis matters to avoid double-taxation at withdrawal).
All withdrawals from a traditional IRA are taxed as ordinary income. The 10% early withdrawal penalty applies to distributions before age 59½ (with exceptions similar to Roth). Required Minimum Distributions (RMDs) must begin at age 73 — the IRS requires withdrawals at a minimum rate based on life expectancy tables, ensuring the tax-deferred benefit doesn't persist indefinitely.
The traditional IRA is the foundation for the backdoor Roth conversion strategy used by high earners, and for 'rollover IRAs' — accounts created when employees move 401(k) balances from former employer plans. Keeping rollover funds in a separate traditional IRA preserves future backdoor Roth eligibility by avoiding the pro-rata rule complication.
Inheritance rules changed under the SECURE Act (2019) — most non-spouse beneficiaries must now withdraw the entire inherited IRA within 10 years, eliminating the 'stretch IRA' strategy that allowed decades of tax-deferred growth for heirs.
FAQs
Should I contribute to a traditional or Roth IRA?
The key question is whether your current marginal tax rate is higher or lower than your expected retirement rate. If lower now (young, low income, currently in a low bracket), Roth is usually better. If higher now (peak earning years, expecting lower retirement income), traditional is usually better. When uncertain, diversify between both types to hedge against future tax rate uncertainty.
What are Required Minimum Distributions (RMDs)?
RMDs are mandatory annual withdrawals from traditional IRAs and most employer retirement plans starting at age 73. The IRS requires you to withdraw a minimum amount each year based on your account balance and life expectancy factor from IRS tables. Failure to take RMDs triggers a 25% penalty (reduced to 10% if corrected in two years) on the shortfall. Roth IRAs have no RMDs during the owner's lifetime.
What happens to my traditional IRA when I die?
A surviving spouse can treat the inherited IRA as their own (rolling it over to their IRA). Most other beneficiaries must now withdraw the full balance within 10 years of the original owner's death (SECURE Act 2019). Annual RMDs during the 10-year period depend on whether the owner had started taking distributions. Eligible designated beneficiaries (minor children, disabled individuals, not-more-than-10-years-younger) have different rules.
Related Terms
Roth IRA
An individual retirement account funded with after-tax dollars, offering tax-free growth and tax-free withdrawals in retirement.
401(k) Matching
An employer contribution to employees' 401(k) retirement accounts, typically matching a percentage of employee contributions up to a salary limit.
Health Savings Account
A tax-advantaged savings account paired with a high-deductible health plan, offering triple tax benefits for qualified medical expenses.
Compound Interest
Interest calculated on both the initial principal and previously accumulated interest, enabling exponential growth of savings and investments over time.
