Originally published May 2016. Last updated March 2026.
A traditional IRA is one of the simplest and most effective ways to save for retirement. But the rules have changed since these accounts were created in 1974, and a lot of what people think they know is outdated.
Here’s how traditional IRAs actually work right now.
[toc]
What Is a Traditional IRA?
A traditional IRA is an individual retirement account where your contributions may be tax-deductible, and your investments grow tax-deferred. You pay income tax when you withdraw the money in retirement.
Think of it as a deal with the IRS: skip paying tax now, pay it later. If you expect to be in a lower tax bracket in retirement, that’s a good deal.
2025 Contribution Limits
- Under age 50: $7,000 per year
- Age 50 and older: $8,000 per year (includes $1,000 catch-up)
You can contribute to a traditional IRA at any age, as long as you (or your spouse) have earned income. The old rule that prohibited contributions after age 70 and a half was eliminated by the SECURE Act in 2020.
Tax Deduction Rules
Whether your contribution is tax-deductible depends on two things: whether you (or your spouse) have a retirement plan at work, and your income.
No employer plan? Your full contribution is deductible regardless of income.
You have an employer plan? The deduction phases out based on your modified adjusted gross income (MAGI). For 2025:
- Single filers: full deduction if MAGI is $79,000 or less; no deduction above $89,000
- Married filing jointly: full deduction if MAGI is $126,000 or less; no deduction above $146,000
- If only your spouse has an employer plan: full deduction if combined MAGI is $236,000 or less; no deduction above $246,000
Even if you’re above the income limits, you can still make a non-deductible contribution. That’s the basis for a “backdoor Roth IRA” strategy.
Withdrawal Rules
- Before age 59 and a half: Withdrawals are subject to income tax plus a 10% early withdrawal penalty (with exceptions — see our penalty-free withdrawal guide)
- After age 59 and a half: Withdrawals are taxed as ordinary income, no penalty
- Required minimum distributions: Start at age 73 (or 75 if born after 1960). The penalty for missing an RMD is 25% of the shortfall, reduced to 10% if corrected within two years
Advantages of a Traditional IRA
- Tax-deductible contributions (if eligible) lower your current tax bill
- Tax-deferred growth means no annual capital gains or dividend taxes
- Wide investment choices compared to most employer plans
- No income limits on contributions (deductibility has limits, contributions don’t)
- Spousal IRA allows a non-working spouse to contribute based on the working spouse’s income
Traditional IRA vs. Roth IRA
The main difference: traditional IRAs give you a tax break now, Roth IRAs give you a tax break later.
- Traditional: tax-deductible going in, taxed coming out
- Roth: no deduction going in, tax-free coming out
- Traditional: RMDs required starting at 73/75
- Roth: no RMDs during your lifetime
- Traditional: best if you expect to be in a lower tax bracket in retirement
- Roth: best if you expect to be in the same or higher bracket
Many people benefit from having both. It gives you flexibility to manage your tax bracket in retirement by choosing which account to draw from each year.
FAQ
Can I have both a traditional IRA and a 401(k)?
Yes. You can contribute to both. The $7,000/$8,000 IRA limit and the $23,500/$31,000 401(k) limit are separate. Your IRA deduction might be limited if you have an employer plan, but you can still contribute.
What happens if I contribute too much?
Excess contributions are hit with a 6% penalty per year until you withdraw them. If you catch the mistake before your tax filing deadline, you can remove the excess and any earnings without the penalty.
Should I choose a traditional IRA or Roth?
If you’re in a high tax bracket now and expect a lower bracket in retirement, traditional usually wins. If you’re early in your career with a lower income, Roth often makes more sense. A financial advisor can model both scenarios for your specific situation.
Schedule a free 20-minute consultation to figure out which IRA strategy fits your situation.
R.L. Brown Wealth Management
106 W Vine St, Suite 300, Lexington, KY 40507
859.317.5889
