How a Traditional IRA Works
A traditional IRA is a tax-advantaged retirement account where contributions may be deductible on your federal tax return. Investments grow tax-deferred, meaning you pay income tax only when you withdraw funds in retirement. This structure can lower your taxable income today while letting your savings compound over decades. The account is held at a bank, brokerage, or other qualified custodian, and you choose how to invest within the available options.
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Eligibility depends on your income, whether you or your spouse are covered by an employer retirement plan, and your tax filing status. For 2025, individuals under age 50 can contribute up to $7,000, and those 50 and older can add a $1,000 catch-up contribution, for a total of $8,000. These limits are adjusted periodically for inflation.
Tax Deduction Rules
Not every traditional IRA contribution is fully deductible. If you or your spouse are covered by a workplace retirement plan, the deduction may phase out as your modified adjusted gross income rises. For 2025, single filers covered by a workplace plan begin to see the deduction phase out at around $79,000 of MAGI, and the deduction is fully unavailable at roughly $109,000. For married couples filing jointly, the phase-out range starts near $138,000 and ends near $188,000. If neither you nor your spouse is covered by an employer plan, the contribution is generally fully deductible, subject to the overall contribution limit.
Required Minimum Distributions
You must begin taking required minimum distributions from a traditional IRA by April 1 of the year after you turn age 73. The amount is calculated based on your life expectancy and the prior year-end account balance. Failure to take the full RMD can result in a penalty of up to 25% of the amount that should have been withdrawn, though the IRS often reduces this to 10% if the shortfall is corrected. Distributions are taxed as ordinary income, which can affect the taxation of Social Security benefits and the thresholds for other taxes.
Early Withdrawals and Penalties
Withdrawals before age 59½ generally trigger a 10% early withdrawal penalty on top of ordinary income tax. There are exceptions, including qualified higher education expenses, a first home purchase up to a lifetime limit of $10,000, and certain medical expenses. Substantially equal periodic payments and disability also qualify. Contributions can be withdrawn at any time without penalty because they are made with after-tax dollars when the deduction is not taken, but earnings withdrawn early are subject to the penalty and tax.
Traditional IRA vs. Roth IRA
The key trade-off is when you pay tax. A traditional IRA offers upfront deduction and tax-deferred growth, while a Roth IRA provides no upfront deduction but tax-free growth and qualified withdrawals. Roth IRAs have no RMDs during the original owner's lifetime, which makes them attractive for estate planning. Income limits apply to Roth contributions; for 2025, single filers can make full contributions up to about $146,000 of MAGI, with the phase-out ending at roughly $161,000. Married couples filing jointly have a similar phase-out structure.
Contribution Timing and Spousal Accounts
You can contribute to a traditional IRA for a given tax year anytime between January 1 and the tax filing deadline for that year, typically April 15. A spousal IRA allows a working spouse to contribute for a non-working spouse, as long as the couple's combined contributions do not exceed the earned income of the working spouse or the annual limit, whichever is less. This rule makes it possible for households with one earner to build dual retirement savings.
Setting Up and Managing a Traditional IRA
You can open a traditional IRA at most banks, credit unions, brokerages, and robo-advisors. The process typically involves choosing a custodian, completing an application, and funding the account via transfer, rollover, or contribution. Once established, you can invest in stocks, bonds, mutual funds, exchange-traded funds, CDs, and in some cases real estate and precious metals through a self-directed IRA. Keeping contributions within annual limits and tracking basis carefully helps avoid unnecessary taxes and penalties at withdrawal.