- A traditional IRA is a type of retirement account that allows you to save pre-tax money to use in your retirement years.
- Traditional IRAs are tax-advantaged accounts funded with after-tax dollars.
- In 2024, you can contribute up to $7,000 annually to your IRAs if you're under 50.
A traditional IRA is a retirement savings account with robust tax advantages and growth-earning capabilities. Contributions to a traditional IRA are tax-deferred, so you won't pay tax on that money until you withdraw it during retirement. Eligible participants can also receive tax deductions.
Here's what you need to know about traditional IRAs as one of the best retirement plans for workers, including traditional IRA contribution limits, tax benefits, and withdrawal rules.
Understanding traditional IRAs
Definition and overview
A traditional IRA is an individual retirement account funded with pre-tax income — or money you have yet to pay taxes on. Like an employer-sponsored 401(k) or 403(b), the funds in your IRA grow over time due to compound interest and various risk-adjusted investment opportunities. When you withdraw that money in retirement, you pay taxes.
With a traditional IRA, you are responsible for contributions and investments — as opposed to employer-sponsored accounts provided and managed by your employer. Moreover, IRAs are generally considered more flexible than 401(k)s, with more investment options and strategies.
"You have to be willing to do your homework and then make a decision and get started," advises Patricia Stallworth, MBA, CFP® and founder of The MoneyWise Woman, of choosing which type of retirement account to use. "If you find out you've made the wrong decision, then change it. You're not stuck. You're not stuck anywhere."
Anyone with earned income is eligible to open a traditional IRA through an online brokerage or other financial institution.
How traditional IRAs work
Contributing funds to a traditional IRA and deferring your taxable income can be extremely beneficial. Because they're invested, your funds will accrue compound interest over time, which means the earlier you start contributing to an IRA — even in small amounts — the better off you'll be.
One of the most appealing parts of a traditional IRA is that almost anyone is eligible to contribute. The one requirement is that you have "taxable compensation," meaning that for any given year, you make money from a salary or wages instead of methods like rental properties, interest, or a pension.
While there used to be an additional requirement that those contributing to traditional IRAs be younger than 70 1/2, that condition was waived in 2020.
Benefits of a traditional IRA
Tax advantages
Since traditional IRAs are tax-deferred, you don't pay taxes on the funds when you add them to the account but rather when you withdraw them. Another traditional IRA tax benefit is that your contributions may be deducted from your total taxable income for that year, placing you in a lower tax bracket.
Contribution limits
The IRS enforces traditional IRA contribution limits based on age. Employees 50 and older can contribute a slightly higher portion of funds compared to younger employees. In 2024, you can contribute up to $7,000 in your IRA if you're under 50. Those 50 and older can make a catch-up contribution of $1,000 each year.
Stallworth explains, "Even though that seems like it's not that much, over time, it can turn into a tremendous amount of money."
Potential for growth
The money invested in a traditional IRA has the potential for growth through compounding and risk-adjusted investment opportunities. IRAs come with a wide variety of investment options, including:
- Stocks
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Certificates of deposit (CDs)
Contribution rules for traditional IRAs
Annual contribution limits
The IRS limits how much you can contribute to a traditional IRA each year to prevent higher earners from unfairly benefiting from more tax advantages than regular workers. The annual limit usually increases by $500 each year to match inflation.
In 2024, workers younger than 50 can contribute up to $7,000 of their pre-tax income to a traditional IRA. This is assuming that your taxable compensation is above those numbers. If it isn't, you can contribute up to the amount of your taxable compensation, but no higher.
There's no requirement that you add the full amount every year. But if you do want to maximize your contributions, it's important to note that the $7,000 limit applies to the total amount contributed to all your individual retirement accounts.
For example, adding $3,000 to your Roth IRA will leave you just $4,000 to contribute to your traditional IRA until the next tax year, when the amounts reset.
"The thing I like to tell my clients is to contribute money into different kinds of buckets," says Stallworth. "Having those different kinds of buckets gives you more flexibility with your income and taxes when you start taking those distributions."
Catch-up contributions for traditional IRAs
If you're 50 or older, you can contribute more than the standard annual contribution limit to make up for your younger working years when you may not have been able to dedicate as much of your annual income toward your future retirement. This is classified as a "catch-up" contribution.
Workers over 50 can contribute an additional catch-up contribution of $1,000 each year for a total of up to $8,000 in 2024.
Income limits for deductions
Depending on the amount you contribute to your traditional IRA, your AGI (adjusted gross income), and marital status, you may get a deduction on your federal income tax return.
Here's the deduction limit if you're covered by a retirement plan at your workplace in 2024. We've also included limits for 2023 for comparison.
| Tax filing status | Modified adjusted gross income | Deduction limit |
| Single, head of household or married filing separately and you do not live with your spouse | 2023: $73,000 or less 2024: $77,000 or less | Full deduction |
2023: Between $73,000 and $83,000 2024: Between $77,000 and $87,000 | Partial deduction | |
2023: $83,000 or more 2024: $87,000 or more | No deduction | |
| Married filing separately and you live with your spouse | 2023 and 2024: $10,000 or less | Partial deduction |
| 2023 and 2024: $10,000 or more | No deduction | |
| Married filing jointly or widow/widower | 2023: $116,000 or less 2024: $123,000 or less | Full deduction |
2023: Between $116,000 and $136,000 2024: Between $123,000 and $143,000 | Partial deduction | |
2023: $136,000 or more 2024: $143,000 or more | No deduction |
Not everyone is eligible to claim deductions. Certain limitations — such as household income or additional retirement plans — can reduce or eliminate how much you can deduct. That said, you'll still be able to contribute to your account and benefit from growth-earning opportunities.
Withdrawals and distributions for traditional IRAs
Early withdrawal penalties
In theory, you can withdraw from your traditional IRA at any time. But to avoid additional traditional IRA penalties and taxes, it is best practice to wait until age 59½ to begin disbursements. Early withdrawals that don't qualify for certain hardship exemptions are subject to an additional 10% penalty fee on the amount withdrawn.
Certain other retirement plans also offer hardship exemptions for folks who need a penalty-free way to withdraw funds in an emergency. For example, 401(k) hardship withdrawal may be a better option to secure quick money rather then a personal loan, but it should be treated as a last resort.
Qualifying hardship exemptions that don't incur the 10% penalty include immediate and heavy financial need, such as:
- Terminal illness
- Qualified birth or adoption
- Qualified disaster recovery
- Domestic abuse
- Costs relating to a primary residence
- Education related expenses
If you make a qualifying hardship distribution, you can't repay the funds to their account or roll it over to another retirement plan or IRA.
Required minimum distributions for traditional IRAs
You are required to start withdrawing from your traditional IRA once you turn 73. Your first mandatory required minimum distribution (RMD) is April 1 of the year after you reach 73. After the first year, you must take an RMD by December 31.
How much you need to withdraw is calculated based on how much is in your traditional IRA and your life expectancy.
If you fail to take your RMD by the IRS deadline, you will be subject to a 25% excise tax on the amount that should have been withdrawn. You may be able to reduce this to a 10% tax if corrected in a timely manner.
How to open a traditional IRA
Choosing a provider
These days, it couldn't be easier to invest with a traditional IRA. Financial institutions like banks and brokerages offer nearly endless opportunities to sign up, with options at brick-and-mortar locations and online.
The best online brokerages offer you a secure way to hold your investments, as well as provide easy access to the investment market. Some of the best traditional IRA providers include the following:
Some firms require your initial deposit to be above a certain dollar amount, and others have steep annual maintenance fees folded into the contract. It's important to shop around for the account that best meets your needs, and to read any and all materials closely before you sign anything to make sure no unexpected expenses are hiding.
Steps to open an account
Opening a traditional IRA only takes a few steps. Once you decide on your IRA provider, go to the firm's website and begin the account opening process. You will have to provide the necessary personal information, such as:
- Name
- Date of birth
- Bank account information
- Employment information
- Social Security number
You may have to answer a few questions about your retirement goal assessment and/or risk tolerance.
Funding your traditional IRA
Traditional IRAs are funded with pre-tax dollars via your bank account or by transferring assets from an existing traditional IRA. You may also be able to fund your account with a 401(k) rollover, which doesn't incur penalty fees or taxes.
Comparing traditional IRAs to other retirement accounts
Traditional IRA vs. Roth IRA
There are two different types of individual retirement accounts — traditional and Roth — and the difference between them comes down to when taxes are paid on your contributions. Because while all retirement accounts are tax-advantaged, that doesn't mean you can avoid taxation altogether.
For Roth IRAs, taxes are paid at the time of contribution, allowing for tax-free growth and withdrawals, but there's an income cap for contributions. Only those who earn under $161,000 in 2024 — or under $240,000 for married folks filing jointly or qualifying widowers — are eligible to add to their Roth.
A traditional IRA or 401(k) is the best fit for folks currently in a high tax bracket. But if you're in a lower tax bracket right now — and expect to be in a higher one later on — a Roth IRA is a more suitable option.
Traditional IRA vs. 401(k)
A majority of 401(k) plans provided by employers are funded with pre-tax money, similar to traditional IRAs. Both plans grow due to capital gains and compound interest payments. Account holders also benefit from tax-deferred payments, decreasing your initial tax-deductible income.
Generally, a 401(k) is the stronger retirement saving option compared to an IRA because of its higher contribution limits, employer-match benefits, automatic paycheck deductions, and access to top-performing professionally managed mutual funds.
If you don't have access to an employer-sponsored retirement plan, a traditional IRA is the next best thing. You will have more control over how your money is invested and managed with an IRA. Plus, fees are typically lower than 401(k)s.
Traditional IRA FAQs
What is the difference between a traditional IRA and a Roth IRA?
The main difference between a traditional IRA and a Roth IRA is the tax advantage. A traditional IRA offers tax-deferred growth, with tax-deductible contributions. Roth IRAs, on the other hand, are funded with after-tax dollars so withdrawals are tax-free.
What are the contribution limits for a traditional IRA?
The contribution limit for a traditional IRA is up to $7,000 for workers under 50 in 2024. Workers age 50 and older can contribute an additional catch-up contribution of $1,000.
When can I withdraw from my traditional IRA without penalty?
You can withdraw from your traditional IRA without penalty once you reach age 59½. You can also avoid the 10% early withdrawal fee if you qualify for hardship distribution.
What are the tax benefits of a traditional IRA?
The tax benefits of a traditional IRA are the initial tax breaks you receive by deferring a portion of your annual income into your account. You are still responsible for paying tax on those funds when you withdraw during retirement. However, if you can pay less in taxes if you're in a lower tax bracket compared to your working years.
How do required minimum distributions (RMDs) work?
Required minimum distributions (RMDs) are the amount you must withdraw from your retirement savings starting at age 73. How much you have to withdraw depends on how much is in your account and your life expectancy.
