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Traditional individual retirement accounts (IRAs) are tax-advantaged retirement savings accounts. You can make pre-tax contributions and your money grows tax-deferred. While traditional IRAs can be a useful savings tool, there are early withdrawal penalties and income limits for deductions to be aware of. Learn more about traditional IRAs to determine if they fit your needs.
How a Traditional IRA Works
Unlike an employer-sponsored retirement savings plan like a 401(k), an individual IRA is a retirement savings account you own and invest in yourself. The funds (including earnings and gains) in traditional IRAs aren’t taxed until you withdraw the money, which means that growth in the account is tax-deferred. The contributions you make can also be deductible from your taxable income, potentially lowering how many taxes you owe for the year.
| Did You Know? |
| There are other types of IRAs, like a Roth IRA, which is funded with pre-tax contributions, so there is no tax on withdrawals. A Roth IRA can be especially beneficial for those who predict they’ll be in a higher tax bracket later in life when they withdraw, though both a traditional IRA and Roth IRA can make sense for a wide variety of retirement savers. |
A traditional IRA can be opened at most brokerage firms, banks and credit unions. Once you open your account, you can fund your IRA with investment assets like stocks and bonds, or savings vehicles such as a certificate of deposit.
Traditional IRA Rules
The Internal Revenue Service (IRS) has rules for investing with a traditional IRA that you should be aware of before opening an account.
IRAs have annual contribution limits, which are adjusted each year. For 2024, people under age 50 can contribute up to $7,000. People over age 50 can contribute an extra $1,000, bringing their limit up to $8,000.
There are also early withdrawal penalties. If you withdraw funds before age 59 1⁄2, you’re required to pay taxes and the federal government will charge you a 10% early distribution penalty (there may also be a state penalty). There are exceptions to the 10% penalty outlined by the IRS, including for some educational and medical expenses and for a first-time home purchase up to $10,000.
Once you start making withdrawals at age 59 ½, you’ll owe taxes on the amount withdrawn, which will be taxed at your current income tax rate. But you won’t face penalties. And when you hit age 73, you need to withdraw required minimum distributions (RMDs) annually.
There’s no age limit for opening a traditional IRA. You only need earned income to qualify.
Income Limits on Deductions
While everyone with earned income can contribute to a traditional IRA, not everyone can deduct those contributions. If you or your spouse have an employer-sponsored retirement plan and your modified adjusted gross income (MAGI) exceeds a certain limit, you may be able to only partially deduct your contribution, or not deduct the contribution at all.
The following limits apply to taxpayers who are covered — or have a spouse who is covered — by an employer-sponsored retirement plan, such as a 401(k).
| Filing status | 2024 MAGI range | Deduction limit |
| Single taxpayers | $77,000 or less | Full deduction |
| More than $77,000, but less than $87,000 | Partial deduction | |
| $87,000 or more | No deduction | |
| Married couples filing jointly (you’re covered by a workplace retirement plan) | $123,000 or less | Full deduction |
| More than $123,000, but less than $143,000. | Partial deduction | |
| $143,000 or more | No deduction | |
| Married couples filing jointly (your spouse is covered by a workplace retirement plan but you are not) | $230,000 or less | Full deduction |
| More than $230,000, but less than $240,000 | Partial deduction | |
| $240,000 or more | No deduction | |
| Married filing separately (you or your spouse is covered by a retirement plan at work) | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
Source: IRS
Who Is Best Suited for a Traditional IRA
A traditional IRA is best suited for someone who wants to save for retirement in a tax-advantaged way instead of — or in addition to — an employer-sponsored retirement savings plan. In fact, financial advisors tend to say that having a mix of an employer-sponsored retirement plan, traditional IRA and Roth IRA can help you diversify your retirement portfolio. Just make sure if you’re contributing to a traditional IRA and Roth IRA, you don’t exceed the total IRA contribution limits. Because your earnings grow tax-deferred, a traditional IRA can be a great option for those saving for retirement and other long-term goals.
New and experienced investors alike can invest via IRAs, since setting them up is fairly straightforward and there are no age restrictions. If you’re unsure about whether opening an IRA makes sense for your specific situation, consider speaking with a licensed financial advisor.
Sources:
IRS. (2024, January 30). Topic No. 451, Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/taxtopics/tc451
IRS. (2023, December 20). IRS Reminds Those Aged 73 and Older To Make Required Withdrawals From IRAs and Retirement Plans by Dec. 31; Notes Changes in the Law for 2023. Retrieved from https://www.irs.gov/newsroom/irs-reminds-those-aged-73-and-older-to-make-required-withdrawals-from-iras-and-retirement-plans-by-dec-31-notes-changes-in-the-law-for-2023
IRS. (2023, December 1). Traditional IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-iras
IRS. (2023, November 1). 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000. Retrieved from https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
