What Is a Traditional IRA? Rules and Tax Benefits You Should Know

What Is a Traditional IRA?

A Traditional IRA is an individual retirement account (IRA) that helps you save for retirement with potential tax advantages. It can be opened by anyone who has taxable compensation, regardless of age.

Contributions can be either deductible (pre-tax) or nondeductible (after-tax) depending on your income and whether you’re covered by a workplace retirement plan. Earnings inside the account grow tax-deferred, meaning you don’t pay taxes on investment gains until you take money out.

How Does a Traditional IRA Work?

A Traditional IRA works by giving you a way to save for retirement while delaying some taxes. You can put money into the account each year, and depending on your income and whether you or your spouse are covered by a workplace plan, your contributions may be deductible.

If your contribution is deductible, it can lower your taxable income for that year. 

✏️ Hypothetical Example: 

If you earn $60,000 and make a $3,000 deductible contribution, your taxable income drops to $57,000.

The money inside your Traditional IRA grows tax-deferred. This means you don’t pay taxes on investment earnings until you take money out of the account.

When you start taking withdrawals in retirement, distributions are taxed as ordinary income. Withdrawals made before age 59½ usually face a 10% additional tax unless you qualify for an exception.

📝 Note: Checking your eligibility for a deductible contribution before funding your account can help you plan your tax strategy more effectively.

Who Is Eligible for a Traditional IRA?

Anyone who earns taxable income can open and contribute to a Traditional IRA. Unlike a Roth IRA, there are no income limits that prevent you from contributing. Even if your income is high, you’re still allowed to add money to the account.

However, your ability to deduct contributions may be limited if you or your spouse are covered by a workplace retirement plan such as a 401k. In that case, your modified adjusted gross income (MAGI) determines whether your contributions are fully deductible, partially deductible, or not deductible at all. You can still contribute, but you may not receive a tax deduction.

Traditional IRA Deduction Limits for 2025

✅ Full deduction: MAGI of $79,000 or less.
✅ Partial deduction: MAGI over $79,000 but under $89,000.
✅ No deduction: MAGI over $89,000.

📝 Note: These MAGI limits apply if you or your spouse are covered by a workplace retirement plan. Use Worksheet 1-1 in IRS Publication 590-A to calculate your MAGI.

When Can You Withdraw From a Traditional IRA?

You can start taking money from a Traditional IRA without the 10% penalty once you reach age 59½. Withdrawals made before 59½ are generally taxable and may also trigger a 10% additional tax unless you qualify for an exception.

After age 59½, distributions are still taxed as ordinary income but no longer face the 10% additional tax. The term “qualified distribution” is used for Roth IRAs, not Traditional IRAs.

Can You Take Out Contributions Like a Roth IRA?

Roth IRA contributions can be withdrawn at any time without taxes or penalties. Traditional IRA funds work differently. You can technically withdraw money at any time, but amounts taken before 59½ are generally taxable and may face a 10% additional tax unless an exception applies. After 59½, there’s no 10% additional tax on withdrawals.

Is There a 5-Year Rule?

There is no 5-year rule for Traditional IRAs. That rule applies to Roth IRAs and other Roth retirement accounts. With a Roth IRA, you must be at least 59½ and have had the account for at least five years to make tax-free withdrawals. 

With a Traditional IRA, once you reach 59½, you can begin taking withdrawals regardless of how long the account has been open.

📝 Note: Planning when to take withdrawals can help you avoid penalties and manage your tax bill more effectively.

Required Minimum Distributions (RMDs)

A Traditional IRA requires you to start taking minimum distributions at age 73. These withdrawals ensure that taxes are eventually paid on money that has been growing tax-deferred. This means you cannot leave the account untouched indefinitely to keep compounding without taxes.

A Roth IRA is different. The original owner of a Roth IRA has no lifetime required minimum distributions (RMDs). This gives Roth IRA holders more flexibility in managing their funds during retirement.

📌 Tip: If you have a Traditional IRA with another provider, you can consolidate it with Carry to manage everything in one place. Learn how it’s done here.

Contribution Limits

For 2025, you can contribute up to $7,000 to a Traditional IRA. If you’re age 50 or older, you’re allowed an additional $1,000 catch-up contribution, bringing your total annual limit to $8,000.

📝 Note: These limits apply across all your Traditional IRAs combined, not per account.

How to Open a Traditional IRA

Opening a Traditional IRA is straightforward and can be done through banks, credit unions, brokerage firms, or online investment platforms. You only need taxable compensation to qualify, and there’s no age limit for making contributions. 

Your income does not prevent you from contributing, though it may affect whether your contributions are deductible if you’re covered by a workplace plan.

You can also contribute to a Traditional IRA even if you’re already contributing to a 401k through your full-time job. This flexibility allows you to build retirement savings in more than one account at the same time.

📝 Note: Before opening an account, compare fees, investment choices, and customer support across different providers to find the best fit for your needs.

What Can You Invest In?

Most Traditional IRA providers let you choose from common investment options such as individual stocks, mutual funds, bonds, and ETFs. These choices make it easier to diversify your retirement savings.

It’s also possible to invest in alternative assets like real estate or cryptocurrency. To do this, you’ll need to open a self-directed Traditional IRA, which gives you broader investment choices but also requires more responsibility and adherence to IRS rules.

Comparing a Traditional IRA to Other Retirement Accounts

Choosing the right retirement account often comes down to taxes, contribution limits, and eligibility rules. Comparing a Traditional IRA with other options highlights how each plan handles these factors so you can pick one that matches your long-term savings goals.

Traditional IRA vs. Roth IRA

A Roth IRA and a Traditional IRA handle taxes differently.

✅ Traditional IRA: Contributions may be deductible, earnings grow tax-deferred, and withdrawals are taxed as ordinary income. Withdrawals before age 59½ generally face a 10% penalty unless an exception applies.

✅ Roth IRA: Taxes are paid upfront. Qualified withdrawals after age 59½ and meeting the five-year rule are tax-free.

Traditional IRA vs. SEP IRA

A SEP IRA is designed for business owners and the self-employed.

✅ SEP IRA: Allows much higher employer contributions than a Traditional IRA. Contributions are pre-tax, with taxes deferred until withdrawal. For 2025, the limit is $70,000 (up to 25% of compensation, with a $350,000 compensation cap).

✅ Traditional IRA: Anyone with earned income can contribute. The contribution limit for 2025 is $7,000, or $8,000 for those age 50 and older.

📝 Note: SEP contributions come from the employer (or business, if self-employed), not directly from the individual.

Traditional IRA vs. 401k

A 401k and a Traditional IRA are structured differently:

✅ 401k: An employer-sponsored plan. For 2025, the employee deferral limit is $23,500 (or $31,000 total with a $7,500 catch-up for those age 50+). Investment options are usually limited to the plan menu, though some plans may offer a brokerage window.

✅ Traditional IRA: Not tied to an employer. Offers more control over investment choices, including individual stocks and funds.

❌ Limitation: A 401k typically provides fewer investment options compared to what you can access in a Traditional IRA.

Final Thoughts on Traditional IRAs

A Traditional IRA can play an important role in retirement planning thanks to its potential tax benefits, broad eligibility, and investment flexibility. Knowing how contributions, withdrawals, and required minimum distributions work helps you avoid surprises later.

If you’re considering opening or contributing to a Traditional IRA, start by checking your eligibility for tax deductions, comparing providers, and reviewing the investment options available. Taking these steps can give you a clearer view of how a Traditional IRA fits into your long-term savings goals.

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