Traditional IRA Definition, Rules and Options

A traditional IRA offers thousands in tax deductions, if you're eligible, and it helps you invest for the future.

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What is a traditional IRA?

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.

The benefits of an IRA and Roth IRA

How does a traditional IRA work?

Here are the key characteristics of traditional IRAs and general concepts.

  • You open a traditional IRA at a brokerage, robo-advisor or bank. If you get one from a broker, you’ll be able to invest in stocks and bonds; IRAs from banks generally offer Certificates of Deposit and savings accounts.

  • You invest the money in your account. You can invest in stocks, bonds and other assets. How much your account grows per year and whether you lose money depends on how you invest. For a long-term goal like retirement, stocks and bonds can be a sensible choice because of their higher historical returns. (See how to invest your IRA for simple investment tips.)

  • Contribution limits. You can add $6,000 per year in 2021 and 2022 ($7,000 if you’re 50 or older), even if you’re also contributing to a 401(k) or other workplace savings plan. Generally, you (or your spouse) must have earned income to contribute to an IRA. You can also add to your IRA by rolling over money from another retirement account.

  • Contributions may be tax-deductible. For example, if your income is $60,000 and you contribute $6,000 to a traditional IRA, then your taxable income that year will drop to $54,000, assuming you qualify for the tax deduction (more on that below).

  • Withdrawal rules. You're not taxed on gains until you withdraw them. Early withdrawals may be taxed as income and assessed a 10% penalty.

  • Traditional IRAs aren't the same as Roth IRAs. With Roth IRAs there’s no tax deduction when you make contributions, but your withdrawals come out tax-free in retirement. You never pay taxes on your investment earnings, as long as you follow the Roth IRA rules.

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Here's how to open a traditional IRA account

Two popular ways to get an IRA are through brokers and robo-advisors.

  1. Brokers. If you want to choose investments for yourself, an online broker can be a good way to go. With a broker, you’ll select from investments accessible through that provider, including stocks, bonds and mutual funds. Review our best IRA accounts to compare.

  2. Robo-advisors. If choosing your own investments sounds too daunting, consider a robo-advisor. These providers, which now include many of the most recognizable names in investing, use automated technology to choose investments based on your goals and investing horizon, all for a fraction of what a traditional investment manager might charge. See our list of best robo-advisors for help choosing the right one for you.

» See our roundup of the best IRA providers

What is the benefit of a traditional IRA?

These accounts have more benefits than drawbacks. Here are some of the pros and cons:

Traditional IRA distributions and withdrawals

Here's the basic overview:

  • Generally, you can start taking distributions from a traditional IRA when you reach age 59 1/2.

  • You pay regular income tax on distributions from your traditional IRA. (See what tax bracket you're in.)

  • If you take money out of your traditional IRA before age 59 1/2, you may have to pay a 10% early withdrawal penalty. There are some exceptions to this early withdrawal penalty, such as needing the money for college, buying a house or other reasons.

  • You don't have to start taking distributions from your traditional IRA just because you reached your 59 1/2 birthday. You can wait. However, you can't wait forever; you must start taking required minimum distributions (RMDs) when you reach age 70 1/2 or 72, depending on your birthday.

Who is eligible for a traditional IRA?

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.

Qualifying for a traditional IRA when you have a 401(k) or other employer plan

  • If you or your spouse has a retirement plan at work, the amount of your traditional IRA contribution that you can deduct is reduced, or eliminated altogether, once you hit a certain income. You can still make contributions, but they won’t be tax-deductible.

  • If you, and your spouse if you're married, don't have retirement plans at work, then you can deduct your IRA contribution no matter how much your income.

Note: The income limits apply to your modified adjusted gross income (MAGI), which is your adjusted gross income with some deductions and exclusions added back in. See IRS Publication 590-A, Worksheet 1-1, for complete instructions on figuring MAGI for traditional IRAs.

Traditional IRA limits in 2021 and 2022

These income limits apply only if you (or your spouse) have a retirement plan at work.

Filing status

2021 MAGI

2022 MAGI

Deduction

Single or head of household (and covered by retirement plan at work)

$66,000 or less

$68,000 or less

Full deduction

More than $66,000 but less than $76,000

More than $68,000 but less than $78,000

Partial deduction

$76,000 or more

$78,000 or more

No deduction

Married filing jointly (and covered by retirement plan at work)

$105,000 or less

$109,000 or less

Full deduction

More than $104,000 but less than $124,000

More than $105,000 but less than $125,000

Partial deduction

$125,000 or more

$129,000 or more

No deduction

Married filing jointly (spouse covered by retirement plan at work)

$198,000 or less

$204,000 or less

Full deduction

More than $198,000 but less than $208,000

More than $204,000 but less than $214,000

Partial deduction

$208,000 or more

$214,000 or more

No deduction

Married filing separately (you or spouse covered by retirement plan at work)

Less than $10,000

Less than $10,000

Partial deduction

$10,000 or more

$10,000 or more

No deduction

Should I contribute to a traditional IRA if I can’t deduct it?

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:

  1. A Roth IRA, if you’re eligible. These accounts have income eligibility rules, but they are higher than the limits to deduct traditional IRA contributions. See our IRA limits page.

  2. Your employer-sponsored retirement plan. Consider maxing that account out before making nondeductible IRA contributions. That could actually make your eligible for an IRA deduction because your contributions to the workplace plan lower your taxable income for the year.

If after exhausting both of those options, you still want to consider the nondeductible route, see our page on nondeductible IRAs.

Other types of IRAs

The are other popular types of IRAs out there, such as Roth, SEP and SIMPLE. But there are also these types of IRAs: backdoor Roth, spousal, self-directed, inherited and rollover. You can learn more about each of these IRAs and more in our IRA guide.

FAQs

It is possible, depending on what you invest your IRA money in. If you’re investing in the stock market, there will be times your account balance may dip when the market does what it’s historically done over short periods of time: seesaw between highs and lows. But don’t let that spook you.

Over the long term — which is the investing time horizon you have in your IRA — investing in the stock market gives you the biggest bang for your buck. From a historical standpoint, an investment in an index mutual fund that tracks the returns of 500 of the largest U.S. companies is likely to far outpace what you’d earn investing in Treasury bonds, T-bills or even gold.

The key to ensuring any losses are just temporary is to stay the course. Having a long-term investing time horizon and the temperament to weather the storm are how fortunes are made. Fidelity Investments studied the behavior of about 1.5 million people in workplace retirement plans. It found that investors who continued to invest in stocks even through the 2008-09 market crash ended up 10 years later with account balances about 50% higher than people who sold out of stocks during the downturn.

Both IRAs and 401(k)s are retirement savings accounts, and both offer tax breaks as an incentive to sock away money for your future. But 401(k)s are available only through an employer (in technical IRS language, they're employer-sponsored retirement plans), while an IRA can be set up by any individual who has earned income.

Other noteworthy differences:

  • 401(k)s have higher annual contribution limits than IRAs: $19,500 in 2021 ($20,500 in 2022) versus $6,000 in an IRA.

  • Catch-up contribution limits are also beefier in workplace plans: If you’re age 50 or older, the IRS allows you to save an additional $6,500 in 2021 and 2022 in a 401(k). The maximum annual catch-up contribution allowed in an IRA is $1,000.

  • You have until the tax-filing deadline in April of the following year to make contributions to an IRA. Contributions to a 401(k) must be made by Dec. 31 in order to qualify for the current tax year.

  • Some 401(k)s have a vesting period where employees have to wait a certain period of time before they’re allowed to participate in the plan. There’s no vesting period with an IRA.

  • Some employers sweeten the pot with 401(k)s and kick in their own money to match a portion of what employees save. That extra money may be subject to a vesting period.

  • Investment offerings in a 401(k) are determined by the plan administrator. In an IRA the choices are much broader: If you choose to open an account at a discount brokerage you can pick from mutual funds, exchange-traded funds (ETFs), stocks and more.

If you’re wondering if it’s better to have a 401(k) or an IRA, here’s some good news: You don’t have to choose. The IRS allows savers to contribute to both an IRA and a 401(k) at the same time. And if you leave your company, you can take the money with you and roll it over into an IRA. (Here’s how to do a rollover IRA.)

Our advice: If your 401(k) offers an employer match, invest enough to get the full match. After that, direct your retirement savings dollars into a Roth or traditional IRA to take advantage of the more expansive line-up of investments.

Here’s a more detailed take on the IRA vs. 401(k) question, including a simple plan for how to maximize your returns and minimize your costs.

Many discount brokers and robo-advisors have $0 minimums to open an IRA. You can see which ones in our roundup of best IRA providers. However, the tax perks of investing in an IRA start only when you start contributing money to the account. But don’t worry: You don’t need to come up with your full contribution all at once. You’re also not required to save the maximum the IRS allows (up to $6,000 in 2021 and 2022, or $7,000 if you’re age 50 or over).

You can add money to your IRA at whatever cadence and amount work for your budget. Many brokers and robos allow savers to set up automatic deposits to transfer money from your bank into your account.

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