Traditional IRA Definition, Rules and Options
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A traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA.
Here are the key characteristics of traditional IRAs and general concepts.
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Two popular ways to get an IRA are through brokers and robo-advisors.
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These accounts have more benefits than drawbacks. Here are some of the pros and cons:
Here's the basic overview:
The good news: Everyone can open and contribute to a traditional IRA. The bad news: Not everyone is eligible to deduct contributions to a traditional IRA.
Note: The income limits apply to your modified adjusted gross income (MAGI), which is your with some deductions and exclusions added back in. See , Worksheet 1-1, for complete instructions on figuring MAGI for traditional IRAs.
These income limits apply only if you (or your spouse) have a retirement plan at work.
Nondeductible IRA contributions can still be valuable: Money for retirement is money for retirement, and your investment earnings will still grow tax-deferred. But this can also be a headache: You are responsible for keeping track of after-tax contributions by filing IRS Form 8606 each year so you’re not taxed again on that money when you take retirement distributions.
In short, there are better options you should max out before going down the nondeductible IRA road. They are:
If after exhausting both of those options, you still want to consider the nondeductible route, see our page on .
The are other popular types of IRAs out there, such as , and . But there are also these types of IRAs: , , , and . You can learn more about each of these IRAs and more in .
