While nobody will argue the importance of saving for retirement, debates abound regarding the best way to do so especially given the plethora of options available. From 401(k) and health savings accounts (HSAs) to Roth IRAs and real estate, a one-size-fits-all approach to fund your retirement simply doesn’t exist. Rather, it all depends on your own individual circumstances. Let’s dive into one such option—traditional IRAs—to help understand if it’s the right choice for you.
Key Takeaways
- What it is: A traditional IRA is funded with pre-tax dollars — contributions and earnings grow tax-deferred, and you pay ordinary income tax on withdrawals during retirement.
- Contribution limits: For 2026, you can contribute $7,500 ($8,600 if 50+) — and you have until the April 15 tax deadline to make prior-year contributions.
- Who can deduct: Anyone with earned income can contribute, but if you or your spouse have a workplace retirement plan, deduction phaseouts kick in ($81K–$91K single / $129K–$149K MFJ in 2026).
- Early withdrawal rules: Pulling money before 59½ generally triggers a 10% penalty plus income tax — with exceptions for first-time home purchases (up to $10K), birth/adoption, higher education, and disability.
- RMDs and inheritance: Required minimum distributions kick in at age 73 (75 in 2033) — and most non-spouse heirs must drain an inherited traditional IRA within 10 years, potentially pushing them into a higher bracket.
What is a traditional IRA?
A traditional IRA is an individual retirement account that sets out to help fund your retirement. In doing so, you contribute pre-tax money into the account, where your contributions and earnings grow tax-deferred—meaning you won't owe taxes on them until you withdraw the money in retirement.
How does a traditional IRA work?
After opening a traditional IRA, you can invest in many different types of assets within the account including CDs, stocks, bonds, ETFs, index funds, and mutual funds—with contributions and earnings growing tax-deferred, as previously mentioned. When you withdraw money from the account in retirement, however, you'll pay taxes on that same amount.
Traditional IRA types
Traditional IRAs come in a variety of forms. Some of the most common include:
SEP IRAs
SEP IRAs are available to those who operate as a sole proprietor or business owner, are in a partnership, or earn self-employment income by providing a service.
Simple IRAs
A SIMPLE IRA behaves similarly to a 401(k) plan but is designed specifically for small businesses and self-employed individuals.
Spousal IRAs
A spousal IRA isn’t a special type of account but in fact just your typical Roth or traditional IRA with the same set of rules. The sole difference lies in the fact that a spousal IRA is opened by your spouse, in his or her name, and has a few distinct eligibility requirements.
Traditional IRA advantages
Deferred taxes
The biggest benefits associated with a traditional IRA are tax-related since these are considered “tax-deferred” accounts: meaning you’ll pay taxes on a later date. Any contributions you make are typically funded with pre-tax dollars, therefore, and earnings also grow tax-deferred until you withdraw them in retirement.
Tax diversification
These tax benefits are very appealing to investors, especially those (most of us) who find it difficult (if not impossible) to predict what their tax bracket will look like during retirement. More specifically, these breaks help diversify retirement income by complementing any tax-free accounts you may already have.
Additional investment options
Compared to a 401(k) or 403(b) account, an IRA generally features more investment options as you can invest in the stocks, bonds, mutual funds, and/or ETFs of your choosing. Moreover, IRAs offer some early-withdrawal exceptions a 401(k) doesn’t such as the ability to withdraw money for school or fund a first-time home purchase.
Traditional IRA disadvantages
As with any investment, traditional IRAs also come with a few drawbacks:
Retirement taxes
You’ll pay income taxes on both contributions and gains when you make withdrawals in retirement. This can be especially challenging if your income sources aren’t properly diversified.
Early withdrawal penalties
While you can withdraw money from a traditional IRA at any time, you’re required to pay corresponding taxes, and your withdrawal may trigger penalties if you withdraw funds before age 59½.
RMDs
Required minimum distributions (RMDs) are the amount of money the IRS dictates you withdraw from your account every year. Unlike its Roth IRA counterpart, a traditional IRA is subject to RMD rules—meaning you need to make withdrawals upon turning 73 (75 beginning in 2033). Annual withdrawals are then due by December 31st every year thereafter.
Potential tax liability for heirs
If you have a balance in your traditional IRA when you pass away, your heirs will also need to take RMDs from the account—typically over a 10-year period—with this added income potentially placing them in a higher income tax bracket and thus apt to pay more in taxes.
Traditional IRA contribution limits
As with many retirement accounts, a traditional IRA caps how much you can add each year. A traditional IRA has the same contribution limits as a Roth IRA: for 2026, those under 50 can contribute up to $7,500, which rises to $8,600 at age 50 and older (these thresholds change annually). The extra $1,100 for the older age group is a "catch-up" contribution, something the IRS offers to encourage savings and help ease the financial burden of retirement, especially for those who didn't save enough when they were younger.
Note you can continue to make contributions for the previous year up until the income tax deadline. In other words, you can do so (in any amount, up to the limit) for the 2026 tax year until April 15, 2027.
Traditional IRA income limits
| Your situation | Full deduction | Partial deduction | No deduction |
|---|---|---|---|
| Single or head of household — covered by a work plan | MAGI below $81,000 | $81,000 – $91,000 | $91,000 or more |
| Married filing jointly — you're covered | MAGI below $129,000 | $129,000 – $149,000 | $149,000 or more |
| Married filing jointly — spouse covered, you're not | MAGI below $242,000 | $242,000 – $252,000 | $252,000 or more |
| Married filing separately — covered* | — | $0 – $10,000 | $10,000 or more |
Anyone can open and fund a traditional IRA account given the absence of income limits, but if you’re seeking tax-deductible contributions, the IRS does have income restrictions based on how much you earn and whether you or your spouse currently participate in other qualified retirement plans such as a 401(k). For example, those not participating in a retirement plan at work can deduct their full IRA contribution regardless of income. Alternatively, if you do have an employer-sponsored retirement plan, IRA deductions are limited based on filing status and modified adjusted gross income (MAGI).
More specifically, for 2026, if you're covered by a plan at work: single filers with a MAGI below $81,000 can deduct the full contribution, those between $81,000 and $91,000 get a partial deduction, and those at $91,000 or above get none. For married couples filing jointly where you're the covered spouse, the full deduction is available below $129,000, a partial deduction between $129,000 and $149,000, and none at $149,000 or above.
If you're not covered by a workplace plan but your spouse is, you can deduct the full amount with a joint MAGI below $242,000, a partial amount between $242,000 and $252,000, and none at $252,000 or above. (These thresholds are adjusted annually.)
Traditional IRA penalties
While you can withdraw money from a traditional IRA at any time, you’re required to pay corresponding taxes and your withdrawal may trigger penalties (depending on timing). For example, an early-withdrawal penalty of 10% is generally assessed on those who withdraw money from their traditional IRA before age 59½. However, as with most rules, exceptions can help you skirt the 10% penalty including:
· Using funds for a first-time home purchase (up to $10,000)
· Using a distribution in the year you become a parent via birth or adoption (up to $5,000)
· Paying for qualified higher education for you or an immediate family member
· Having unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
· Acting as the beneficiary of a deceased owner
· Becoming completely and permanently disabled
· Being called up for active military duty (for more than 179 days)
Note that the SECURE Act 2.0 has expanded these circumstances to include emergency expenses and domestic abuse.
How to open a traditional IRA
You can open a traditional IRA at almost any bank, credit union, or other financial institution: with the former two options typically taking shape as an IRA certificate of deposit (CD). This is sometimes a good option for people who want to minimize their risk and guarantee their return.
Alternatively, you can do so via your financial advisor or online brokerage and thus enjoy the ability to choose your investments and potentially reap higher returns—albeit with more risk.
How to contribute to a traditional IRA
You generally need earned income (i.e., income earned through a job) to contribute to a traditional IRA.
How the saver’s credit works
A retirement savings contributions credit (or “saver’s credit”) is designed to encourage people with low-to-moderate incomes to save for retirement, essentially rewarding participants who contribute to a qualified retirement account—including traditional IRAs—with a tax credit of up to $1,000 ($2,000 for married couples).
In sum: choosing a traditional IRA
How do you know if a traditional IRA is right for you? It’s simple! This option often makes the most sense if your employer doesn’t offer a retirement plan and/or you maxed out your 401(k) and want to save additional pre-tax money.
Have questions about how an IRA fits into your overall investments? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.
Reviewed for accuracy
Benjamin Stark, CFP®
Financial Advisor and Director of Client Experience at Vision Retirement, with 10+ years as a financial advisor.
Read full bio →FAQs
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The amount can vary depending on the provider you choose (many in fact have no minimum requirement, allowing you to open an IRA with as little as $0), with the decision ultimately based on your own unique financial situation and goals.
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Yes. As with any investment, it is possible to lose money in an IRA often due to market volatility, poor investment selection, early withdrawals and investments fees, or a combination of these.
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While a traditional IRA is a tax-deferred account (meaning you’ll pay taxes on a future date, contributions are typically funded with pre-tax dollars, and earnings growing tax-deferred until you withdraw them in retirement), a Roth IRA tasks you with making contributions using after-tax money that can then grow tax-free (you also won’t pay taxes on withdrawals made during retirement, assuming the account is at least 5 years old).
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This is done via a Roth IRA conversion and involves rolling over all (or a portion) of your balances from either an existing traditional IRA, SEP, or SIMPLE IRA into a Roth IRA. One of the most common reasons for doing so is the ability to enjoy tax-free withdrawals in retirement; however, keep in mind corresponding tax implications are involved.
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Generally speaking, designated beneficiaries—those who aren’t a spouse, minor child of the deceased owner, chronically ill or disabled, or more than 10 years younger than the account owner—must follow the 10-year rule when inheriting an IRA. This requires you to withdraw funds from the inherited account within 10 years of the IRA owner’s death (e.g., if an IRA owner passed away in 2026, inherited IRA funds must be fully distributed by December 31, 2036).
If you’re the sole beneficiary of your spouse’s IRA, click here to check out a few options in this regard.
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Contributions beyond annual IRA limits can trigger an IRS penalty, but you’re in fact allowed to backtrack in this case. Those who’ve already filed can remove excess earnings within 6 months and file an amended tax return, while those who haven’t can withdraw excess contributions and earnings received on them (either scenario requiring you to pay taxes on earnings in the absence of a penalty). Another option is to reduce the following year’s contribution by the excess amount, but keep in mind you’ll pay a 6% penalty on the excess contributed for every year it remains in the account.
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Akin to Roth IRAs, you aren’t allowed to take out a loan from a traditional IRA unlike with other retirement vehicles such as a 401(k).
Disclosures
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
