How does a traditional IRA work?
A traditional IRA is an individual retirement account that offers tax advantages to savers. It’s called a “traditional” IRA to distinguish it from a Roth IRA (more on those below).
Here are key details on traditional IRAs:
The IRA contribution limit for 2019 is $6,000, or $7,000 if you’re 50 or older. (Those limits are up from $5,500 and $6,500 in 2018.) You can use an IRA to save even if you already have a workplace retirement plan, such as a 401(k).
If you’re eligible for the tax deduction, traditional IRA contributions are deducted in the year they are made.
Even if you don’t qualify for the deduction, you can contribute to a traditional IRA.
Investments grow tax-deferred, meaning you won’t be taxed on gains until you withdraw them.
Retirement distributions are taxed as ordinary income.
Unless they meet certain conditions, early withdrawals may be taxed as income and assessed a 10% penalty.
Because of the upfront tax deduction, traditional IRAs are especially attractive if you’re looking to reduce your tax bill today. And if you expect your tax rate will go down in retirement, you stand a decent chance of minimizing your overall tax burden by choosing a traditional IRA.
Roth IRAs offer an alternative strategy. These accounts reverse the tax benefit of a traditional IRA: 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.
For more, read our Roth vs. traditional IRA comparison.
Who qualifies 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 their contributions to a traditional IRA. The IRS doesn’t want you to squeeze too much out of the system, so if you or your spouse has a retirement plan at work, the amount of your traditional IRA contribution that you can deduct is reduced, then eliminated altogether, once you hit a certain income.
You can still make contributions, but they won’t be tax-deductible. See the table below for details.
What are the benefits of traditional IRAs?
These accounts have far more benefits than drawbacks. Still, it’s important to note the strengths and weaknesses when choosing the best retirement account for you:
Should you contribute if you can’t deduct?
Nondeductible IRA contributions can still be valuable: Money saved for retirement is money saved 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:
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 for the 2018 and 2019 guidelines on both account types.
Your employer-sponsored retirement plan. You should max that out before making nondeductible IRA contributions. Doing so may actually enable you to be 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.
Where can you open a traditional IRA?
Many financial services companies offer traditional IRAs, including online brokers and robo-advisors.
If you want to select your own investments for your IRA, an online broker is likely a good home for your account. With a broker, you’ll select from investments accessible through that provider, including stocks, bonds and mutual funds. (Remember, a traditional IRA isn’t an investment itself, but an account that holds investments.)
» See our full roundup of the the best IRA providers.
Here are some of NerdWallet’s top broker picks for IRAs:
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.
Here are some of NerdWallet’s top picks for IRA robo-advisors: