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). Because of the upfront tax deduction, traditional IRAs are especially attractive if you’re looking to reduce your tax bill today.
Here's how it works: When you make a contribution to a traditional IRA, the amount of your contribution reduces your taxable income for the year. 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).
Key details on traditional IRAs:
The annual IRA contribution limit for both 2020 and 2019 is $6,000 ($7,000 if you’re 50 or older), up from $5,500 ($6,500) in 2018.
You can save in an IRA even if you have a workplace plan, such as a 401(k).
Anyone can contribute to a traditional IRA, but not everyone can deduct contributions.
Investments grow tax-deferred; you're not taxed on gains until you withdraw them.
Early withdrawals may be taxed as income and assessed a 10% penalty.
Roth IRAs 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.
» Check out our Roth vs. traditional IRA comparison
Do I qualify 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, or 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. (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 income limits in 2019 and 2020
These income limits apply only if you (or your spouse) have a retirement plan at work.
What are the benefits of a traditional IRA?
These accounts have more benefits than drawbacks. Here are some of the pros and cons:
Should I contribute to a traditional IRA if I can’t deduct it?
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 2020 and 2019 limits on both account types.
Your employer-sponsored retirement plan. Max that account 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 I 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.)
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.
Many banks also offer IRAs, but usually the investment choices at a bank are limited to certificates of deposit. For a long-term goal like retirement, we generally suggest a diversified mix of stocks and bonds, because that mix historically has offered a much higher rate of return.
» See our full roundup of the the best IRA providers.
If you like the idea of a robo-advisor, here are some of NerdWallet’s top picks for IRA robo-advisors:
If you like the idea of picking your own investments, here are some of NerdWallet’s top broker picks for IRAs: