A Traditional IRA (Individual Retirement Account) is a U.S. retirement savings account that allows individuals to contribute pre-tax or post-tax income, with earnings growing tax-deferred until withdrawn. For many people, especially those without access to a workplace retirement plan or who want to supplement one, the Traditional IRA is a key component of long-term retirement planning. It’s simple to open, widely available, and supported by banks, brokers, and investment platforms across the country.
The main appeal of a Traditional IRA is its ability to reduce taxable income now (when contributions are deductible), and allow the investments inside the account to grow without being taxed annually. Taxes are paid when the money is withdrawn — ideally in retirement, when income and tax rates are often lower.
Contribution limits
In 2025, individuals can contribute up to $7,000 to a Traditional IRA. Those aged 50 or older can contribute an additional $1,000, for a total of $8,000. These limits apply across all IRA accounts combined — not per account.
Contributions can be made as long as the individual has earned income (wages, salary, self-employment income), and there’s no upper age limit for contributions, provided you’re still working.
Deductibility rules
Contributions to a Traditional IRA may be fully, partially, or non-deductible, depending on income and whether you or your spouse is covered by a workplace retirement plan.
- If neither you nor your spouse is covered by a plan at work, contributions are fully deductible regardless of income.
- If you are covered by a workplace plan, deductions phase out between $77,000 and $87,000 (single) or $123,000 to $143,000 (married filing jointly).
- If only your spouse is covered, your deduction phases out between $230,000 and $240,000.
When contributions aren’t deductible, you can still make them — but you must track the after-tax basis using IRS Form 8606. Withdrawals in retirement will be partially tax-free to reflect the non-deductible contributions.
Tax treatment
The Traditional IRA provides tax-deferred growth, meaning dividends, interest, and capital gains are not taxed while the funds remain in the account. Withdrawals are taxed as ordinary income, regardless of the source of investment growth.
If you withdraw funds before age 59½, you’ll pay both income tax and a 10% early withdrawal penalty, unless an exception applies (disability, certain medical expenses, qualified first-time home purchase up to $10,000, etc.).
Required Minimum Distributions (RMDs)
Starting at age 73, account holders must begin taking Required Minimum Distributions from a Traditional IRA, even if they don’t need the money. The annual amount is based on life expectancy and the account balance.
Failure to take the RMD results in a significant penalty — 25% of the amount that should have been withdrawn, reduced to 10% if corrected quickly.
RMDs cannot be avoided unless the account is converted to a Roth IRA prior to RMD age, which comes with its own tax consequences.
Investment flexibility
Traditional IRAs can hold a wide range of investments:
- Stocks
- Bonds
- Mutual funds
- ETFs
- Certificates of deposit
- REITs
- Some alternative assets (if using a self-directed IRA)
The exact range depends on the provider. Most people use IRAs to build low-cost, diversified portfolios through mutual funds or ETFs. Others use them to hold conservative assets like bonds or CDs as they approach retirement age.
Conversions and rollovers
Funds from a Traditional IRA can be converted to a Roth IRA, but the converted amount is taxed as ordinary income in the year of the conversion. This strategy — often called a Roth conversion — is used when individuals expect to be in a higher tax bracket later or want to reduce future RMDs.
You can also roll over funds from a 401(k) or similar plan into a Traditional IRA when leaving a job. This is tax-free as long as it’s done properly via direct rollover and doesn’t involve taking possession of the funds.
Who a Traditional IRA suits
- Workers without access to a workplace retirement plan
- Individuals wanting to reduce taxable income in high-earning years
- Those planning to retire in a lower tax bracket
- People who want simple, low-cost retirement saving without income limits
- Anyone seeking tax-deferred growth on investments
Common pitfalls
- Forgetting RMDs: A common and expensive mistake
- Mishandling non-deductible contributions: Leads to double taxation if not tracked properly
- Early withdrawals: Result in penalties and tax hits unless exceptions apply
- Neglecting conversions: Some miss the opportunity to reduce future RMDs or lock in lower tax rates
Seen from Pension Gruber
We meet guests who used their Traditional IRA consistently for decades and now draw from it without stress. They understood it was about regular contributions and compound growth, not picking stocks or timing markets. Others come in asking why their withdrawals are being taxed — not realising their entire IRA balance was tax-deferred, not tax-free.
Some of the more financially confident retirees planned conversions carefully in their 60s, lowering future RMDs while keeping taxes manageable. The ones who ignored the account or mixed deductible and non-deductible contributions without tracking — they usually find out too late how messy the tax side can get.
The Traditional IRA rewards early, consistent effort. It doesn’t require creativity. Just discipline.
