Traditional IRA Definition, Rules and Options
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What is a traditional IRA?
A traditional IRA is a type of individual retirement account that allows owners to make pre-tax contributions. While annual contributions could result in a tax break for that year, withdrawals made during retirement will be subject to income tax.
How does a traditional IRA work?
Opening an IRA account is available to anyone who earns income and wants to plan for retirement. What makes a traditional IRA different from other types of IRAs is that owners receive a tax benefit when making contributions.
For example, if your income is $60,000 and you contribute $6,000 to a traditional IRA, your taxable income for that year will drop to $54,000 if you qualify for the tax deduction (more on that below). When you reach 59 1/2 years of age and can start withdrawing from the account, those withdrawals will be subject to income tax.
Opening a traditional IRA can be done 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. 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.)
There are annual contribution limits when it comes to IRAs. You can contribute up to $6,000 in 2022 and up to $6,500 in 2023, even if you’re also contributing to a 401(k) or other workplace savings plan. Those 50 or older can contribute an additional $1,000 per year. 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.
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What are the benefits of a traditional IRA?
While there are many benefits of a traditional IRA, it's important to remember the limitations. Here are some of the pros and cons:
There are no income limits to open and contribute to a traditional IRA.
If you tap the money before age 59½, you’ll pay taxes and a 10% early distribution penalty, unless your withdrawal qualifies as an exception. (Here’s a full list of the traditional IRA early distribution rules.)
If you're eligible for the tax deduction on contributions, you can claim it whether or not you itemize deductions on your tax return.
You must begin taking distributions — called required minimum distributions — at age 73. (There are no required minimum distributions with Roth IRAs.)
Tax-deferred growth means any gains you would pay taxes on in a standard brokerage account are pushed down the road.
If you're covered by a retirement plan at work, your ability to deduct IRA contributions may be reduced or eliminated at higher incomes.
You can use traditional IRA money to pay for qualified college expenses without paying an early distribution penalty, although you'll pay taxes on the distribution.
You can use up to $10,000 from a traditional IRA toward the purchase of your first home (again, you’ll owe taxes on the distribution but no penalty).
You pay regular income tax on distributions from your traditional IRA. See what tax bracket you're in
How to open a traditional IRA
To open a traditional IRA, decide what kind of investor you want to be – hands on or hands off.
Hands-on investing. If you want to choose your own investments, you might consider an online broker. With a broker, you’ll select from investments accessible through that provider, including stocks, bonds and mutual funds.
Hands-off investing. If choosing your own investments sounds too daunting, consider the hands-off approach with 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, for a fraction of what a traditional investment manager might charge.
» See our roundup of the best IRA providers, divided by hands-on brokers and hands-off robo-advisors
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 and reap the tax benefits of 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 2022 and 2023
These income limits apply only if you (or your spouse) have a retirement plan at work.
2022 or 2023 income range
Single or head of household (and covered by retirement plan at work)
2022: $68,000 or less. 2023: $73,000 or less.
2022: More than $68,000, but less than $78,000.
2023: More than $73,000, but less than $83,000.
2022: $78,000 or more. 2023: $83,000 or more.
Married filing jointly (and covered by retirement plan at work)
2022: $109,000 or less. 2023: $116,000 or less.
2022: More than $109,000, but less than $129,000.
2023: More than $116,000, but less than $136,000.
2022: $129,000 or more.
2023: $136,000 or more.
Married filing jointly (spouse covered by retirement plan at work)
2022: $204,000 or less. 2023: $218,000 or less.
2022: More than $204,000, but less than $214,000.
2023: More than $218,000, but less than $228,000.
2022: $214,000 or more. 2023: $228,000 or more.
Married filing separately (you or spouse covered by retirement plan at work)
2022 and 2023: Less than $10,000.
2022 and 2023: $10,000 or more.
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:
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.
Your employer-sponsored retirement plan. Consider maxing that account out before making nondeductible IRA contributions. That could actually make you 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.