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Setting aside money for the future can feel like just another item on a long to-do list, especially when there are bills to pay and goals to juggle right now. But if you've ever wondered whether there's a simple way to save on taxes while putting something away for later, a Traditional IRA might be worth a closer look. It’s not just for seasoned investors. It’s for anyone thinking ahead, even just a little.
What Is a Traditional IRA?
A Traditional IRA (Individual Retirement Account) is a custodial account that can hold a variety of investment options, which carry their own risks. It's an option for retirement savings that typically allows you to deduct contributions and defer taxes on investment gains until you withdraw the money in retirement.
How It Works
A Traditional IRA generally requires you to contribute earned income. Once the money is in the account, you can invest it in a variety of assets. Those investments grow tax-deferred, meaning you won’t typically owe federal income taxes on interest, dividends, or capital gains until you withdraw the money in retirement. However, performance is not guaranteed, and investments may lose value.
When you take distributions, the amount withdrawn is typically taxed as ordinary income, depending on your tax bracket at that time.
Who It’s For
A Traditional IRA is available to anyone with earned income. There’s no longer an age limit on contributions, as long as you have income from work.
It could be worth considering if:
- You're looking to potentially reduce your current taxable income
- You expect to be in a lower tax bracket during retirement
- You want to build retirement savings outside of a workplace plan like a 401(k)
How to Get Started
Getting started with a Traditional IRA generally involves:
- Opening an account through a bank, brokerage, or online investment platform.
- Choosing between managing investments yourself or using a managed option.
- Funding the account and selecting investments, such as mutual funds, ETFs, bonds, or individual stocks.
So how much should you save for retirement? Use our Retirement Savings Calculator!
What Are Rollovers & How do They Work?
A rollover involves moving money from an employer-sponsored retirement plan, such as a 401(k), 403(b), or 457(b), into a Traditional IRA. This process typically preserves the tax-deferred status of your retirement savings and may offer more control over investment choices.
Why Consider a Rollover?
You may want to roll over assets to a Traditional IRA for several reasons:
- Expanded Investment Choices: Unlike many workplace plans, IRAs typically offer a broader range of investments.
- Consolidation: Moving multiple retirement accounts into one IRA may simplify account management and help you track your overall investment strategy.
- Continued Tax Deferral: Rolling over funds typically doesn’t trigger taxes, as long as the transfer is completed properly.
Types of Rollovers
- Direct Rollover: The money moves directly from your workplace plan to your Traditional IRA. You don't handle the funds, and no taxes are withheld.
- Indirect Rollover: You receive the money and then have 60 days to deposit it into a Traditional IRA. If the rollover isn’t completed within 60 days, the IRS may treat it as a taxable distribution, and it may also be subject to a 10% early withdrawal penalty if you're under age 59½.
Other Considerations
- After-Tax Contributions: If your workplace plan includes after-tax or Roth contributions, those portions may require special handling or a separate Roth IRA.
- Fees and Services: Traditional IRAs may have different fee structures than workplace plans. It’s worth comparing account fees, advisory services, and investment options before making the switch.
- Required Minimum Distributions (RMDs): Once the money is in a Traditional IRA, RMD rules generally apply beginning at age 73, even if you’re still working.
What Are Some Key Benefits of a Traditional IRA?
Tax-Deferred Growth
Investment gains grow without being taxed until withdrawn, giving your savings more time to potentially compound.
Potential Tax Deduction
Depending on your income level and whether you're covered by an employer-sponsored retirement plan, your contributions may lower your taxable income today.
Broad Investment Choices
You’re not limited to your company’s retirement plan menu. Traditional IRAs offer access to various investment options:
- Mutual funds: Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. A professional fund manager typically makes the investment decisions.
- ETFs: ETFs are similar to mutual funds in terms of diversification but trade on stock exchanges like individual stocks. Most track an index, such as the S&P 500 or a sector-specific benchmark.
- Bonds: Bonds are loans to governments, municipalities, or corporations that pay interest over time. Bond funds group many bonds into one investment product.
- Individual stocks: Shares of ownership in a company that may grow in value or pay dividends.
- Target retirement date funds: A single mutual fund or ETF designed to adjust automatically over time based on a target retirement year (e.g., 2055 or 2060). These funds shift from a more aggressive to a more conservative asset mix as the retirement date approaches. The principal value of a target date fund is not guaranteed at any time, including at or after the funds' target date.
Are There Any Limitations & Rules for Traditional IRAs?
While Traditional IRAs offer flexibility in retirement and potential tax benefits, there are rules and trade-offs to consider.
Contribution Limits: The IRS sets an annual contribution limit for IRAs. For 2025, you can add up to:
- $7,000 per year if you're younger than 50 years old.
- $8,000 per year if you're age 50 or older.1
Income-Based Deduction Limits: If you're covered by a workplace retirement plan, your deduction may be reduced or phased out based on your income level. For example, for single filers in 2025, the phase-out is between 79k and 89k. For married couples filing jointly, the phase-out is between $126k and $146k.1
Here’s how it works if you're a single filer, covered by a workplace retirement plan:
- If your Modified Adjusted Gross Income (MAGI) is below $79k, you may be able to deduct the full amount of your Traditional IRA contribution.
- If your MAGI is between $79k and $89k, the amount you can deduct is gradually reduced.
- If your MAGI is above $89k, your contribution is generally not deductible.
Early Withdrawal Penalties: If you take money out before age 59½, you'll typically face a 10% penalty plus income taxes. However, some exceptions exist for qualified expenses such as medical expenses, higher education expenses, or a first-time home purchase (up to $10,000).2
Required Minimum Distributions (RMDs): These must begin at age 73. Failing to take an RMD can result in a penalty of up to 25% of the amount that should have been withdrawn.3
No Tax-Free Withdrawals: All deductible contributions and any investment gains are subject to income tax upon withdrawals in retirement.
Contribution Deadline: You generally have until the tax filing deadline (usually April 15) to make contributions for the previous tax year.
Investment Risk and Fees: Since you choose the investments, you're responsible for monitoring risk and costs. Some mutual funds and managed accounts can carry higher fees, so it's worth reviewing those details closely.
What Is the Difference Between Traditional IRA & Other Retirement Accounts?
Traditional IRA vs Roth IRA
Understanding the key differences between a Traditional IRA and a Roth IRA may help you decide which one fits your financial needs and retirement goals.
| Feature | Traditional IRA | Roth IRA |
| Tax Timing | Deduct now, pay taxes later | Pay taxes now, withdrawals may be tax-free |
|
Income Limits for Contributions |
None | Contributions phase out above $150k for single filers and $236k for joint filers |
| RMDs | Required after age 73 | None during the account holder's lifetime |
| Withdrawals | Taxed at current income rate after 59½ | Tax-free for qualified withdrawal of earnings (account must be open for 5 years and you must be age 59½) |
Traditional IRA vs 401(k)
When deciding between a Traditional IRA and a 401(k), it's important to consider the unique benefits each offer.
| Feature | Traditional IRA | 401(k) |
| Where It Lives | Opened and controlled by individual | Generally employer-sponsored |
| Contribution Limit | $7,000 ($8,000 if age 50+) | $23,500 ($30,500 if age 50+) |
| Employer Match | Not applicable | Often included, may significantly boost savings |
| Investment Options | Broad, including mutual funds, ETFs, stocks | Usually limited to employer selected menu |
Source: Internal Revenue Service
Final Thoughts
A Traditional IRA may be a critical step in building retirement savings, especially if you’re looking for tax-deferred growth, wider investment choices, or a place to roll over your old 401(k). But it’s not without complexity. It may be worth reviewing your goals and talking to a tax professional about where a Traditional IRA fits into your broader retirement strategy.
A Traditional IRA offers the potential for tax-deferred growth when used as part of a broader retirement savings strategy. Start Your Free Plan
Frequently Asked Questions
Sources
- Internal Revenue Service (2025). "401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000" https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000
- Internal Revenue Service (2025). "Retirement topics - Exceptions to tax on early distributions." https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
- Internal Revenue Service (2025). "Retirement plan and IRA required minimum distributions FAQs." https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
- Internal Revenue Service (2025). "Rollovers of retirement plan and IRA distributions." https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
