Everything you need to know about traditional IRAs
A traditional IRA helps you invest for the future, and could offer tax deductions when you contribute.
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What is a traditional IRA?
A traditional IRA is a type of retirement plan that offers special tax advantages. Eligible contributions are tax-deductible in the year they’re made, potentially lowering your taxable income and tax bill. Investments within the account grow tax-deferred until you make withdrawals in retirement, at which point contributions and earnings are taxed as ordinary income.
💡Who is a traditional IRA best for?
While anyone with earned income (that is, wages, salaries, tips, self-employment income, etc.) can open and contribute to a traditional IRA, its tax advantages make it best suited for:
Individuals who want an upfront tax deduction for their contribution.
Those who expect to be in a similar or lower tax bracket in retirement, as their withdrawals will be taxed at a lower rate.
High earners who want to contribute to a Roth IRA, but aren’t eligible due to income restrictions — with a traditional IRA, they can convert funds through a backdoor Roth IRA (if done through a 401(k) plan, it’s considered a mega backdoor Roth).
Traditional IRA: pros and cons
No income limits to open or contribute. Anyone with earned income can have a traditional IRA.
If eligible for the tax deduction, it can be claimed with or without itemizing deductions on your tax return.
Tax deferred growth. Investment gains aren’t taxed until you withdraw after retirement age, at which point they’re taxed as ordinary income.
While early withdrawals are taxed and penalized, some instances may be penalty (but not tax)-free.
Withdrawals before age 59 ½ are taxed and penalized, unless your withdrawal is for a qualified exception.
Regular withdrawals, called required minimum distributions (RMDs), are required from traditional IRAs starting age 73. RMDs are not required for Roth IRAs.
If you're covered by a retirement plan at work, your ability to deduct traditional IRA contributions may be reduced or eliminated at higher incomes.
How a traditional IRA works
A traditional IRA is one of the most accessible individual retirement accounts because there are no income restrictions to opening and contributing to the account. However, there are rules to keep in mind.
Tax-deductible contributions. To be eligible for a tax deduction for a traditional IRA contribution, you need to meet certain requirements:
If you or your spouse has a retirement plan at work: The amount that you can deduct for your traditional IRA contribution will depend on your income. Even if you can’t receive the full deduction, you can still make a contribution.
If you or your spouse does not have a retirement plan from work: You can deduct your IRA contributions, regardless of your income amount.
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.
Annual contribution limits. Every year, the IRS sets new contribution limits for retirement accounts. For IRAs, this limit is shared, meaning you can have and contribute to multiple IRAs, but the total you contribute can’t exceed this IRS limit.
The IRA contribution limit is $7,000 in 2025 ($8,000 if age 50 and older), even if you're 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, but this money doesn’t count towards the annual contribution limit.
Withdrawal rules. You can make penalty-free withdrawals from your traditional IRA starting age 59 ½. At this point, these withdrawals of earnings and contributions will be taxed as ordinary income.
Withdrawals made before this age are subject to taxes and a 10% penalty, but there are some exceptions.
» More on traditional IRA withdrawal rules.
Required minimum distributions (RMDs). After age 73, you are required to withdraw a minimum amount from your traditional IRA every year. To calculate your RMD, the IRS uses the prior December 31st balance of your traditional IRA and divides it by the life expectancy factor in Publication 590-B. The penalty for failing to withdraw an RMD is 25% of the RMD, which can be reduced to 10% if the RMD is corrected within two years.
» Calculate your required minimum distribution.
Traditional IRA vs Roth IRA: What’s the difference?
The main difference between a traditional IRA and a Roth IRA is when taxes are applied. In a traditional IRA, contributions are tax-deductible while withdrawals made in retirement are taxed.
In a Roth IRA, there is no tax benefit received when making contributions. Instead, once you are able to start making qualified withdrawals during retirement, those funds can be taken out of the account tax-free.
» Compare specifics between traditional and Roth IRA.
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.
» Find the best IRA account for you.
Commonly asked questions about traditional IRAs
“Can you lose money in an IRA?”
Yes, you can lose money with any investment. 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 is how fortunes are made.
“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. Our Roth IRA limits break down the income brackets for contributions. If you earn too much to contribute directly to a Roth IRA, you can also look to a backdoor Roth IRA strategy.
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.
“Are IRAs and 401(k)s the same thing?”
No. 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.
» Learn more about IRAs and 401(k) accounts.
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