Understanding Traditional IRA
Tax-deferred growth with deductible contributions
A Traditional IRA (Individual Retirement Account) allows you to save for retirement with tax-deductible contributions. Your investments grow tax-deferred, meaning you do not pay taxes on gains until you withdraw the money in retirement.
How Traditional IRA Works
Contribute Pre-Tax Dollars
Contributions may be tax-deductible, reducing your taxable income now.
Grow Tax-Deferred
Your investments compound without paying taxes on dividends or capital gains.
Pay Taxes on Withdrawal
Withdrawals in retirement are taxed as ordinary income.
Traditional IRA vs Roth IRA
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | Tax-deductible | After-tax |
| Withdrawals | Taxed as income | Tax-free |
| Required Min. Distributions | Starting at 73 | None |
| Best When | Higher taxes now | Higher taxes later |
Who Should Use Traditional IRA?
Traditional IRA is Best If:
- • You are in a high tax bracket now and expect lower taxes in retirement
- • You want the tax deduction to reduce current taxable income
- • Your income exceeds Roth IRA eligibility limits
- • You do not have access to a workplace retirement plan
- • You are near retirement and want immediate tax benefits
Required Minimum Distributions (RMDs)
Starting at age 73, you must take Required Minimum Distributions from your Traditional IRA each year. Failure to take RMDs results in a 25% penalty on the amount not withdrawn. Use our RMD Calculator to estimate your required withdrawals.
Frequently Asked Questions
Can I contribute to both Traditional and Roth IRA?
Yes, but the combined contribution limit is $7,000 ($8,000 if 50+) across both accounts. You can split contributions however you like between the two.
What is the penalty for early withdrawal?
Withdrawals before age 59½ typically incur a 10% early withdrawal penalty plus income taxes. Some exceptions exist for first-time home purchase, education, and medical expenses.
Can I convert Traditional IRA to Roth IRA?
Yes, you can convert Traditional IRA funds to a Roth IRA at any time. You will pay income taxes on the converted amount, but future growth and withdrawals will be tax-free.