Traditional IRA
A Traditional IRA is an individual retirement account that allows eligible individuals to make potentially tax-deductible contributions, with investment gains growing tax-deferred until withdrawn in retirement.
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 However, every dollar withdrawn is taxed as ordinary income in the year taken.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.