How to Open a Traditional IRA: Eligibility, Contributions, and Investment Options

What Is a Traditional IRA?

A traditional Individual Retirement Account is a tax-advantaged retirement savings vehicle offered by banks, brokerage firms, and robo-advisors. Contributions may be tax-deductible depending on your income and workplace plan coverage, and the investments grow tax-deferred until withdrawal in retirement. Opening a traditional IRA is one of the most straightforward ways to build a retirement nest egg outside of an employer-sponsored 401(k).

Eligibility Requirements to Open a Traditional IRA

Nearly anyone with earned income can open a traditional IRA. The key requirements are straightforward but important to understand before you begin.

Earned Income Requirement

You must have taxable compensation, such as wages, salaries, tips, or self-employment income. Investment income, rental income, or passive earnings do not count toward the eligibility threshold. There is no minimum age to contribute, but you must have earned income at least equal to your contribution amount.

Contribution Age Limits

Prior to the SECURE 2.0 Act of 2022, contributions were prohibited after age 70½. That restriction no longer applies. As long as you have earned income, you can contribute to a traditional IRA regardless of age, making it a viable option for older workers and those who continue earning past the previous cutoff.

How to Open a Traditional IRA: Step by Step

The process of opening a traditional IRA typically takes less than an hour and can be completed online or in person. The steps are consistent across most financial institutions.

• Choose a provider: Compare options including brokerage firms, banks, credit unions, and robo-advisors. Evaluate fees, investment selection, minimum balance requirements, and the quality of customer support.
• Gather documentation: You will typically need a government-issued ID, your Social Security number, an employer identification number if self-employed, and banking information for funding the account.
• Complete the application: Provide personal details, select the account type (traditional IRA), and choose your beneficiaries.
• Select investments: Once the account is funded, choose how to allocate your contributions among stocks, bonds, mutual funds, ETFs, CDs, or other available options.
• Set up contributions: Decide whether to make a one-time deposit or schedule recurring contributions, and automate transfers from your bank account when possible.

Contribution Limits for 2024 and 2025

The IRS sets annual contribution limits for traditional IRAs. Understanding these caps helps you plan your retirement savings strategy effectively.

These limits apply to your combined contributions across all traditional IRAs you hold. Catch-up contributions for those age 50 and older have remained at $1,000 for both years. Contributions must be made in cash; property or securities do not qualify.

Tax Advantages and Deductibility

The primary draw of a traditional IRA is the potential tax benefit. Contributions may be fully or partially deductible on your federal tax return, reducing your taxable income in the year you make the contribution. The deduction depends on your income, filing status, and whether you or your spouse are covered by a retirement plan at work.

Income Limits for Deductibility

If you are covered by a workplace retirement plan, the deductibility of traditional IRA contributions phases out at specific income thresholds. For 2024, single filers covered by a workplace plan begin to see the deduction phased out at $77,000 of modified adjusted gross income and become fully non-deductible at $87,000. Married couples filing jointly face a range of $123,000 to $143,000. These thresholds are adjusted periodically for inflation.

Tax-Deferred Growth

Regardless of whether you take a deduction, your investments grow tax-deferred inside a traditional IRA. You pay taxes only when you withdraw funds in retirement, ideally at a lower tax rate than you faced during your working years.

Withdrawal Rules and Penalties

Traditional IRA withdrawals are taxed as ordinary income. The IRS imposes a 10% early withdrawal penalty on distributions taken before age 59½, with some notable exceptions. These include first-time home purchases (up to a lifetime limit of $10,000), qualified education expenses, and certain medical expenses exceeding a percentage of your adjusted gross income.

Required Minimum Distributions

Starting at age 73, you must begin taking required minimum distributions from your traditional IRA. The SECURE 2.0 Act gradually increased this age from the previous 70½ to 75 by 2033. Failing to take your RMD results in a steep penalty of 25% of the amount that should have been withdrawn, though the penalty is reduced to 10% if the shortfall is corrected promptly.

Investment Options Available

When you open a traditional IRA, the range of investments you can hold is broad and similar to what you would find in a taxable brokerage account. Common options include individual stocks and bonds, mutual funds, exchange-traded funds, certificates of deposit, and annuities. Some providers also allow alternative investments such as real estate investment trusts, precious metals, or private placements, though these come with additional complexity and risk.

Choosing the Right Provider

The provider you select shapes your experience and costs. Full-service brokerages offer extensive research and advisory support but often charge higher fees. Discount brokerages and robo-advisors typically provide lower-cost access to diversified portfolios, making them popular choices for hands-on investors who prefer a self-directed approach. Credit unions and banks may offer simplicity and familiarity but sometimes have more limited investment menus. Compare expense ratios, account maintenance fees, and trading commissions before deciding.

Traditional IRA vs. Roth IRA

Choosing between a traditional IRA and a Roth IRA is one of the most common retirement planning decisions. The core difference lies in the tax treatment of contributions and withdrawals. Traditional IRA contributions may be tax-deductible now, with taxes paid upon withdrawal. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free. Income limits restrict Roth IRA eligibility for high earners, which makes the traditional IRA a valuable alternative for those who earn above the Roth cutoff. Many savers choose to hold both account types to diversify their tax exposure in retirement.