Traditional IRA

The Traditional Individual Retirement Account (IRA) was created by Congress in 1974 alongside ERISA to give workers without employer retirement plans a private savings vehicle. Anyone with earned income — wages, salary, self-employment income, or alimony received under pre-2019 divorce agreements — can contribute, though the deductibility of those contributions depends on income and workplace plan access.

For 2025, the annual contribution limit is $7,000, with an additional $1,000 catch-up allowed for those aged 50 and older, bringing the ceiling to $8,000. You can contribute to a Traditional IRA and a Roth IRA in the same year, but the combined total across all IRAs cannot exceed these limits.

Deductibility phases out when you (or your spouse) are covered by a workplace retirement plan and income exceeds certain thresholds. For 2025, the phase-out for single filers with workplace plan access runs from $79,000 to $89,000 of modified adjusted gross income (MAGI). For married filing jointly with the contributing spouse covered, the range is $126,000 to $146,000. Even when deductibility phases out, you can still make non-deductible contributions; these establish a 'cost basis' tracked via IRS Form 8606, and only the earnings portion is taxed upon withdrawal.

Money inside a Traditional IRA grows tax-deferred: no tax on dividends, capital gains, or interest each year. However, every dollar withdrawn is taxed as ordinary income in the year taken. This differs from long-term capital gains rates available in taxable brokerage accounts, which is an important planning consideration. Withdrawals before age 59½ trigger a 10% penalty unless an exception applies — such as first-time home purchase (up to $10,000 lifetime), qualified higher education expenses, or disability.

The most significant obligation tied to a Traditional IRA is the Required Minimum Distribution (RMD). Under the SECURE Act 2.0, the RMD starting age was raised to 73 for those who turned 72 after December 31, 2022, and will rise to 75 for those born in 1960 or later. Failing to take the full RMD triggers an excise tax of 25% (reduced to 10% if corrected promptly). IRAs offer the widest investment flexibility of any retirement account — stocks, bonds, ETFs, mutual funds, REITs, CDs, and even certain alternative assets through self-directed IRA custodians are all permissible.

Deduction phase-outs require careful attention because they determine whether your Traditional IRA contribution actually reduces your current tax bill. For 2025, a single filer covered by a workplace retirement plan sees their deduction phase out between $79,000 and $89,000 of modified adjusted gross income (MAGI). For married filing jointly where the contributing spouse participates in a workplace plan, the phase-out range is $126,000 to $146,000. A different, wider range applies when the contributing spouse has no workplace plan but their partner does: the deduction phases out between $236,000 and $246,000 of joint MAGI. Above the upper threshold, no deduction is allowed, though non-deductible contributions remain permissible and must be tracked annually on IRS Form 8606. Each year a non-deductible contribution is made without filing Form 8606, the cost basis record is lost, which can create double taxation on future withdrawals.

The Traditional IRA makes the most sense in a specific set of circumstances. When current-year marginal tax rates are higher than the rates expected in retirement, the upfront deduction is worth more than tax-free growth would be, favoring the Traditional IRA over a Roth. This scenario often applies to high-income earners in their peak career years who expect to spend less and thus land in lower brackets after retirement. The Traditional IRA is also advantageous for individuals who expect to execute Roth conversions during low-income years in retirement — they capture the deduction at today's higher rate and pay tax on the conversion at a later, lower rate. Additionally, for earners above the Roth IRA income limits who lack access to a mega backdoor Roth, the Traditional IRA with a subsequent conversion (the backdoor strategy) remains the pathway to Roth-sheltered savings, with the Traditional IRA serving as the mandatory first step.

Deductibility Rules in Detail: The deductibility of a Traditional IRA contribution depends on three variables: whether the contributor or their spouse is covered by a workplace retirement plan, the taxpayer's filing status, and their modified adjusted gross income (MAGI). For a single filer who is not covered by any workplace plan, there is no income limit on deductibility — the contribution is always fully deductible regardless of how high the income. For a single filer who is covered by a workplace plan, the deduction phases out between $79,000 and $89,000 of MAGI in 2025. For a married couple where both spouses are covered, the phase-out for each runs from $126,000 to $146,000. Where only one spouse is covered by a workplace plan, the non-covered spouse has a much higher phase-out range: $236,000 to $246,000. Between the phase-out thresholds, a partial deduction is allowed; the non-deductible portion of the contribution must be reported on Form 8606 to establish basis. Above the upper threshold, no deduction is allowed at all, and the full contribution is non-deductible.

Traditional IRA vs Taxable Account: For investors who do not qualify for a Traditional IRA deduction, the choice between making a non-deductible Traditional IRA contribution and simply investing in a taxable brokerage account deserves careful analysis. The non-deductible IRA grows tax-deferred but is more complex to track (requiring Form 8606 each year) and is subject to RMDs that force distributions in retirement. The taxable account, by contrast, offers no current-year tax benefit but allows long-term capital gains rates on growth (rather than ordinary income rates on IRA withdrawals), allows tax-loss harvesting, and provides a step-up in basis at death. For investors primarily holding index funds with low turnover, the taxable account may produce better after-tax outcomes than a non-deductible IRA over a long time horizon — particularly when the long-term capital gains rate is expected to be significantly lower than the ordinary income rate at withdrawal. The backdoor Roth IRA conversion is generally superior to the non-deductible Traditional IRA as a savings vehicle, which is why most tax advisors recommend executing the full backdoor strategy rather than leaving non-deductible contributions sitting in a Traditional IRA indefinitely.