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Traditional IRA

Investment

Traditional Individual Retirement Account

A retirement account that lets contributions grow tax-deferred, with contributions often deductible today and withdrawals taxed as income in retirement.

Definition

A Traditional IRA is a retirement account that lets your contributions grow without being taxed each year, with the tax bill deferred until you withdraw the money in retirement. For many filers, contributions are also deductible in the year you make them, lowering your taxable income today.

The tradeoff is that every dollar you withdraw in retirement, both contributions and growth, gets taxed as ordinary income. This makes a Traditional IRA most attractive if you expect your tax rate to be lower in retirement than it is now, the opposite logic of a Roth IRA.

Formula

There's no calculation unique to a Traditional IRA beyond standard compound interest growth on contributions, tax-deferred until withdrawal.

Key Things to Know

  • Contribution limits are shared with Roth IRAs. The combined annual limit across both account types applies per person, not per account.
  • Deductibility phases out at higher incomes. If you or your spouse has a workplace plan, the deduction shrinks and eventually disappears above certain income thresholds.
  • Early withdrawals cost more than just tax. A 10% penalty applies before age 59½, on top of the regular income tax owed on the withdrawal.
  • Required minimum distributions are mandatory. You can't leave the money growing tax-deferred forever, the IRS forces withdrawals starting at age 73.
  • A backdoor Roth conversion route exists for high earners. Contributing to a Traditional IRA and converting it shortly after is a common workaround for those above Roth IRA income limits.

Related Calculators

401(k) Calculator →Project your 401(k) retirement savings including employer match and investment growth. See your balance at retirement based on your salary and return.
Federal Income Tax Calculator →Calculate your 2024 US federal income tax owed, effective rate, and marginal bracket by filing status, with standard or itemized deductions.

Related Terms

Roth IRARoth Individual Retirement Account

Frequently Asked Questions

Is a Traditional IRA contribution always tax-deductible?
Not always, it depends on your income and whether you or your spouse has a workplace retirement plan. High earners with an employer 401(k) may get a partial or zero deduction, though the contribution itself is still allowed.
What's the difference between a Traditional IRA and a Roth IRA?
A Traditional IRA gives you a tax deduction now and taxes withdrawals later, while a [Roth IRA](/glossary/roth-ira/) skips the upfront deduction but lets qualified withdrawals come out completely tax-free. Which is better depends on whether you expect to be in a higher or lower tax bracket in retirement.
When can I withdraw from a Traditional IRA without penalty?
Generally at age 59½. Withdrawals before that trigger a 10% early withdrawal penalty on top of regular income tax, with a handful of exceptions like a first home purchase or certain medical expenses.
Do I have to take money out of a Traditional IRA at some point?
Yes, required minimum distributions kick in starting at age 73 under current rules. The IRS wants its tax revenue eventually, since your contributions and growth were never taxed along the way.
Can I contribute to a Traditional IRA and a 401(k) in the same year?
Yes, they have separate contribution limits and you can fund both. Having a 401(k) may just reduce or eliminate the tax deduction on your Traditional IRA contribution depending on your income.