Key takeaways

• Traditional IRAs allow pretax or deductible contributions that have the potential to grow tax-deferred until withdrawal.
• Withdrawals are taxed as ordinary income in retirement, and early distributions may incur IRS penalties.
• Deduction eligibility depends on income and whether an individual is covered by a workplace retirement plan.

Traditional IRAs allow pretax or deductible contributions to potentially grow tax-deferred, with withdrawals taxed as ordinary income. Deduction eligibility varies by income and workplace plan coverage, and required minimum distributions begin at age 73 under current IRS rules.

Individual retirement accounts (IRAs) can be a major component of retirement saving. The traditional IRA remains one of the most widely used tools because it provides an upfront tax advantage and broad accessibility. One difference between employer-sponsored retirement plans and traditional IRAs is that the IRA can be opened and funded independently.

Roth IRAs differ from traditional IRAs because contributions are made with after-tax dollars, while traditional IRAs focus on potential upfront tax deductions. Traditional IRAs function on a simple but powerful premise. Contributions are designed to potentially reduce taxable income today while investments potentially grow on a tax-deferred basis. Savers who think their tax rates may fall in retirement, or who prefer to lower their current taxable income, might consider how traditional IRAs could play a role in their long-term financial strategy.

How does a traditional IRA work?

Traditional IRA contributions are typically made with pre-tax dollars. These contributions may reduce one’s taxable income for the year in which they happen. Any investment earnings inside the account such as interest, dividends, and capital gains, continue to grow tax deferred. Taxes kick in once funds are withdrawn, often during retirement when an individual's taxable income tends to be lower.

The traditional IRA’s tax-deferred structure can enhance the compounding power of long-term investing. With no annual taxes pulling from the account, the full balance has an opportunity to grow over decades, which may result in larger balances compared with taxable accounts that incur annual taxes on gains.

Traditional IRAs are subject to specific withdrawal rules. Distributions are taxed as ordinary income and most withdrawals taken before age 59½ may be subject to a 10% early distribution penalty, since the account is funded with tax-deferred funds. IRS rules include specific exceptions that may allow for early withdrawals without the additional penalty, so long as certain conditions are satisfied.¹

The IRS requires traditional IRA owners to begin taking required minimum distributions (RMDs) once a certain age is reached, depending on current tax law. These mandated withdrawals ensure that deferred taxes are eventually paid.

Read more: What is 401(k) matching and how does it work?

What are the contribution limits and eligibility rules?

Federal law sets annual contribution limits for traditional IRAs. For 2026, individuals may contribute up to $7,500, with an additional $1,100 catch-up contribution available for those age 50 or above. Contributions cannot exceed earned income for the year, although spousal IRAs allow contributions on behalf of a partner with little or no earned income if the household meets certain criteria.²

Anyone with earned income can contribute to a traditional IRA, but their ability to deduct their contributions depends on income and whether they’re covered by a workplace retirement plan, such as a 401(k).³ Eligibility to contribute and eligibility to deduct are separate rules, and individuals may still contribute even when income limits reduce (or eliminate) deductions. The IRS sets annual income-based phase-out ranges that determine whether contributions are fully deductible, partially deductible, or nondeductible, depending on filing status and workplace plan participation.⁴

Tax deductions for traditional IRA contributions phase out as income rises and may be eliminated entirely once a person’s income exceeds IRS-defined limits.⁵ Contributions that are not deductible are still allowed and must be tracked for tax purposes.

These income-based rules often influence whether traditional IRAs serve as the primary retirement savings vehicle for an individual or as a supplementary option alongside workplace programs.

How are traditional IRAs taxed?

Traditional IRAs operate under a tax-deferred structure. Contributions made on a deductible basis reduce current taxable income, while contributions made on a nondeductible basis establish a cost basis that must be tracked for future tax reporting.⁶ Regardless of the contribution type, any investment growth accumulates without current taxation because gains are deferred until withdrawal.

Withdrawals from a traditional IRA are taxed as ordinary income because the account grows on a tax-deferred basis.⁷ Earnings and deductible contributions are taxed when withdrawn. Only the non-deductible contributions are not subject to income tax upon withdrawal, as these funds were already taxed before going into the account. This structure can benefit individuals who expect to be in a lower tax bracket in retirement than during their higher-earning years.

The IRS requires RMDs be taken on traditional IRAs by age 73.⁸ RMD calculations are based on account balances and IRS life expectancy tables. Individuals who do not take RMDs face substantial tax penalties.

What can be invested inside a traditional IRA?

Traditional IRAs provide broad investment flexibility. Most accounts allow access across multiple asset categories:

• Mutual funds
• Exchange-traded funds (ETFs)
• Individual stocks
• Corporate or government bonds
• Certificates of deposit (CDs)
• Target date retirement funds

This range typically exceeds the investment menus available through many workplace plans, which may limit selections based on price and provider agreements. The flexibility of traditional IRAs can support a tailored investment approach that evolves over time. IRS rules do restrict certain types of holdings, such as collectibles and other prohibited assets, but most mainstream investment options remain accessible.

How does a traditional IRA compare with a Roth IRA?

Traditional and Roth IRAs reflect two fundamentally different tax strategies for retirement saving, depending on when taxation occurs and how income might change.

A traditional IRA may offer a tax deduction for contributions, potentially lowering taxable income in the year the contribution is made. Any earnings inside the account grow tax-deferred, and taxes apply when the funds are withdrawn in retirement as ordinary income. These features often appeal to individuals who expect to be in a lower tax bracket later in life, or who want to reduce taxable income during higher-earning years.

Roth IRA contributions are generally funded with after-tax dollars.⁹ Although contributions are not tax-deductible, qualified withdrawals are generally tax-free. Roth IRAs may be particularly beneficial for savers who anticipate high tax rates in the future, or those who prioritize tax-free income streams later in life.

Key Differences between traditional and Roth IRAs

A few distinctions determine when each IRA type may be most effective:

• Income limits: Roth IRAs impose income restrictions on who can contribute directly.¹⁰ Traditional IRA contributions are allowed at any income level, though deductibility may be limited or eliminated for those participating in workplace retirement plans.
• RMDs: Traditional IRAs require distributions beginning at the IRS-mandated age. Roth IRAs do not require RMDs during the original owner’s lifetime, giving savers more flexibility and control over the timing of withdrawals.¹¹

How does a traditional IRA compare with a 401(k)?

Traditional IRAs are frequently compared with employer-sponsored 401(k) plans. While both offer tax-deferred growth potential, several structural differences influence how each account is used.

Contribution limits

401(k) plans allow significantly higher annual contributions than IRAs, enabling workers to save more through workplace plans when eligible.¹² Matching contributions from employers can help boost savings further, when available.

Investment options

The array of investment options available under a 401(k) plan are determined by employers or plan administrators. Traditional IRA investments are chosen by the account owner, and generally provide a broad selection of investments that include individual stocks, bonds, CDs, mutual funds, and target-date funds.

Fees

Some 401(k) plans carry administrative fees or plan costs that don't typically apply to many IRA accounts, though fees vary by provider and investment choice across both account types.¹³

Withdrawal rules

Both account types impose penalties for early withdrawals and require RMDs in retirement. However, 401(k)s may allow loans or hardship withdrawals, which are not available with IRAs.

Rollovers

Traditional IRAs often serve as rollover destinations when workers leave an employer. A rollover moves money from a 401(k) or similar workplace plan into an IRA. Using a direct rollover helps keep the funds tax-deferred while avoiding the 20% withholding, which helps preserve the full account balance in one place while consolidating retirement savings.

Other IRA structures

Several IRA variants support different employment and income situations:

• SEP IRAs: Allow higher employer-funded contributions; common among self-employed individuals and small business owners.
• SIMPLE IRAs: Designed for small employers; involve both employer and employee contributions under streamlined rules.
• Spousal IRAs: Allow contributions on behalf of a non-earning or lower-earning spouse as long as the household meets income requirements.

When is the deadline to contribute to a traditional IRA?

Traditional IRA contributions for a given tax year may be made until the federal tax filing deadline, typically mid-April of the following year.¹⁴ This timing gives savers additional flexibility once their income and tax picture become clearer.

What are traditional IRAs often used for?

Traditional IRAs support long-term savings goals for individuals seeking an immediate tax benefit, or for those who want to supplement workplace retirement plans. They also serve as a flexible home for assets accumulated across multiple jobs, especially when used to consolidate old 401(k) balances. Their tax structure, accessibility, and broad investment range have made them a consistent component of retirement planning for decades.

What a traditional IRA is and what makes it unique

A traditional IRA provides a straightforward, tax-efficient way to build retirement savings. Its combination of potential tax deductions, tax-deferred growth, and broad investment options offers flexibility at various life stages. Deductibility rules, withdrawal requirements, and RMD timing all shape how these accounts work in practice, however. Following all IRS tax codes and rules is essential for making the most of these accounts. Understanding these mechanics, and how they compare with Roth IRAs and workplace plans, can help savers choose the right mix of retirement tools for their financial goals.

FAQ

What distinguishes a traditional IRA from a Roth IRA?

Traditional IRA contributions may be tax-deductible, with taxes applied later at withdrawal. Roth IRA contributions are made with after-tax dollars, and qualified withdrawals are tax-free.¹⁵ Traditional IRAs require RMDs; Roth IRAs do not during the account owner’s lifetime.

Who can contribute to a traditional IRA?

Anyone with earned income can contribute, regardless of income level. Deductions may be non-deductible at higher incomes, however.

Are traditional IRA contributions tax-deductible?

Deductibility depends on two factors: income level and whether a person is covered by an employer retirement plan. Those without workplace plan coverage often qualify for full deductibility.

When do required minimum distributions begin?

RMDs must begin at the age specified under current IRS rules. The amount is calculated annually based on account balance and life-expectancy tables. Missing an RMD can result in tax penalties.

What investments can be held in a traditional IRA?

Traditional IRAs can hold a broad range of investments, including stocks, bonds, CDs, mutual funds, ETFs, and target-date funds. Certain assets, such as collectibles, are prohibited.

Can traditional IRA funds be accessed early?

Withdrawals before age 59½ are generally subject to income tax and a 10% penalty. Certain exceptions apply, including qualified medical expenses and first-time home purchases.

Can a traditional IRA receive rollovers from a 401(k)?

Yes. Pre-tax assets from employer-sponsored plans, including 401(k)s, can be rolled into a traditional IRA. Direct rollovers help preserve tax-deferred status and avoid mandatory withholding.

What is the contribution deadline for a traditional IRA?

Contributions for a tax year may be made until the federal tax filing deadline the following year, usually mid-April.

How does a traditional IRA fit alongside workplace retirement plans?

Many individuals use a traditional IRA to supplement workplace savings or as a rollover account when changing employers. It can also serve as a savings option when no workplace plan is available.

Investing involves risk, including possible loss of principal.