Traditional IRA

An individual retirement account funded with pre-tax (deductible) or after-tax dollars that grows tax-deferred — contributions may be tax-deductible depending on income and workplace plan access, and withdrawals in retirement are taxed as ordinary income.

A traditional IRA (Individual Retirement Account) is a tax-advantaged retirement savings account in which contributions may be tax-deductible and investment growth is tax-deferred — meaning you pay no taxes on gains, dividends, or interest while the money is in the account. When you withdraw funds in retirement (generally after age 59½), withdrawals are taxed as ordinary income. The fundamental logic of the traditional IRA is: reduce taxable income today by contributing pre-tax dollars, let the money compound without annual tax drag, and pay taxes later — ideally when you're in a lower tax bracket in retirement than during your peak working years.

Contribution limits for traditional IRAs are the same as for Roth IRAs: $7,000 per year in 2024 ($8,000 for those 50 or older), shared across all IRA types. Unlike Roth IRAs, traditional IRAs have no income limit for making contributions — anyone with earned income (or a spouse with earned income) can contribute. However, the ability to deduct those contributions on your tax return phases out based on income if you or your spouse is covered by a workplace retirement plan (401(k), 403(b), etc.). In 2024, the deduction phases out for single filers covered by a workplace plan at $77,000–$87,000 MAGI; for married filing jointly where the contributing spouse has a workplace plan, at $123,000–$143,000.

When a traditional IRA contribution is not deductible — because your income exceeds the phase-out threshold — you're contributing after-tax dollars but still getting tax-deferred growth. This creates what are called 'non-deductible IRA contributions' — basis in the IRA that must be tracked on Form 8606 to avoid being double-taxed on withdrawal. Non-deductible traditional IRA contributions are the first step in the backdoor Roth IRA strategy: contribute after-tax dollars to a traditional IRA, then convert to a Roth. If you have no other pre-tax IRA funds, the conversion is tax-free (you already paid tax on the contribution). If you do have pre-tax IRA funds, the pro-rata rule applies and complicates the conversion.

Traditional IRAs require Required Minimum Distributions (RMDs) beginning at age 73 (as of the SECURE 2.0 Act). Each year, you must withdraw a minimum amount calculated based on your account balance and IRS life expectancy tables — failing to take RMDs results in a 25% excise tax on the amount that should have been withdrawn. This mandatory distribution schedule means traditional IRA funds cannot be deferred indefinitely, which affects estate planning strategies. For inherited traditional IRAs, most non-spouse beneficiaries must now fully distribute the account within 10 years of the original owner's death under the SECURE Act rules.

Traditional IRA Deductibility Rules (2024)

  • No workplace retirement plan (you OR spouse): fully deductible at any income level.
  • You have a workplace plan, single filer: fully deductible if MAGI ≤ $77,000; phases out $77,000–$87,000; not deductible above $87,000.
  • You have a workplace plan, married filing jointly: fully deductible if MAGI ≤ $123,000; phases out $123,000–$143,000; not deductible above $143,000.
  • Spouse has a workplace plan but you don't: deductibility phases out at $230,000–$240,000 MAGI for MFJ.
  • Non-deductible contributions: still allowed regardless of income — but must track basis on Form 8606 to avoid double taxation on withdrawal.

Required Minimum Distributions

Traditional IRAs require you to begin taking RMDs at age 73. The annual RMD amount is calculated by dividing your prior year-end account balance by a life expectancy factor from IRS tables. For example, a 73-year-old with a $500,000 traditional IRA would divide $500,000 by the applicable factor (approximately 26.5) to get an RMD of about $18,868 that year. These withdrawals are taxable as ordinary income. As the account grows and the divisor shrinks with age, RMDs become increasingly large — many retirees find that RMDs in their 80s push them into higher tax brackets than they anticipated. Roth IRA conversions during lower-income years before RMDs begin (the 'Roth conversion ladder') can reduce future RMD burden by shrinking the pre-tax IRA balance.

Traditional IRA Withdrawal Rules

  • Age 59½+: withdrawals taxed as ordinary income, no penalty.
  • Before age 59½: withdrawals taxed as ordinary income PLUS a 10% early withdrawal penalty, with certain exceptions (disability, qualified first home purchase up to $10,000, substantially equal periodic payments under Rule 72(t), and others).
  • RMDs: must begin at age 73; failure to take results in a 25% excise tax on the missed amount.
  • Qualified rollover: you can roll over funds from a traditional IRA to a 401(k) or another IRA without tax consequences — useful for cleaning out pre-tax IRA funds before doing backdoor Roth conversions.
  • Inherited IRA: most non-spouse beneficiaries must empty the account within 10 years of the owner's death (SECURE Act); spouses have more options including treating it as their own IRA.

Example

A 45-year-old engineer earning $200,000 participates in his employer's 401(k). His MAGI exceeds the $87,000 deductibility threshold for single filers with a workplace plan, so his traditional IRA contribution would be non-deductible. He contributes $7,000 to a traditional IRA anyway, files Form 8606 to establish basis, and immediately converts the $7,000 to a Roth IRA (the backdoor Roth). Because he has no other pre-tax IRA assets, the conversion is tax-free. He repeats this process every year, effectively funding a Roth IRA despite being over the direct contribution income limit. Had he simply left the $7,000 in a non-deductible traditional IRA without converting, he would have faced RMDs starting at 73 and ongoing tracking headaches for the non-deductible basis.