What Is a Traditional IRA?

Traditional IRAs (individual retirement accounts) let you invest up to $6,000 of your earned income every year into a retirement account — $7,000 if you’re 50 or older. You don’t have to pay taxes on the money or profits from your investments until you withdraw money from the account.

Terry Turner, writer and researcher for RetireGuide
  • Written by
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner has more than 30 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).

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    Matt Mauney
    Matt Mauney, Senior Editor for RetireGuide

    Matt Mauney

    Financial Editor

    Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.

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    Ebony J. Howard, CPA

    Ebony J. Howard, CPA

    Credentialed Tax Expert at Intuit

    Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation.  She specializes in analyzing financial information in the health care, banking and real estate sectors.

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  • Published: September 21, 2020
  • Updated: August 17, 2022
  • 6 min read time
  • This page features 7 Cited Research Articles
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APA Turner, T. (2022, August 17). What Is a Traditional IRA? RetireGuide.com. Retrieved February 3, 2023, from https://www.retireguide.com/retirement-planning/investing/accounts/ira/traditional/

MLA Turner, Terry. "What Is a Traditional IRA?" RetireGuide.com, 17 Aug 2022, https://www.retireguide.com/retirement-planning/investing/accounts/ira/traditional/.

Chicago Turner, Terry. "What Is a Traditional IRA?" RetireGuide.com. Last modified August 17, 2022. https://www.retireguide.com/retirement-planning/investing/accounts/ira/traditional/.

How Do Traditional IRAs Work?

Traditional IRAs allow you to contribute some of your income to a retirement account you set up through a financial institution or licensed financial professional. Your contributions are allowed to grow without being taxed until you take money out of your account.

In addition, you may be able to partially or fully deduct your traditional IRA contributions from your income taxes, depending on your annual income.

Anyone who has taxable income during the year can contribute to a traditional IRA., but your annual contributions cannot be more than the taxable income you earn in the same year.

When you withdraw from a traditional IRA, the money you take out is taxed as income, based on your current tax rate at the time of the withdrawal. The Internal Revenue Service does not assess any taxes on dividends from your investments or any capital gains taxes on your investments in the IRA.

Important Life Events for Traditional IRA Investors
Up to 50 Years Old
You can invest up to $6,000 a year in 2020.
Age 50 and Older
You can invest up to $7,000 a year in 2020.
Age 59 and Six Months
Any withdrawal you make before turning 59 and six months will stick you with a 10 percent penalty and require you to pay income taxes on the withdrawal. Once you reach this age, the penalty goes away.
72 Years Old
You must begin required minimum distributions (RMDs) — regular withdrawals — when you turn 72 or face a 50 percent penalty.

How to Open a Traditional IRA

Unlike a 401(k) plan, which is offered by an employer, you usually have to open a traditional IRA on your own. You can open them through a variety of financial institutions or financial professionals.

Examples of Where You Can Open a Traditional IRA
Traditional IRAs opened through banks tend to be more secure investments, but the trade-off can be a lower return on your contributions. This is because banks tend to limit investments to certificates of deposits instead of stocks and bonds, which can offer higher returns, but can also be more volatile.
Online Brokers
Online brokers can allow you greater freedom to select the investments you want included in your traditional IRA. These are only limited to the stocks, bonds and mutual funds available through that broker.
Robo-advisors automate the process of selecting investments for you, often at a fraction of the cost. Often provided by leading investment firms, the automated systems select investments for your traditional IRA based on your retirement goals, how long you have until retirement and your financial ability to invest over time.

Rules for Distribution and Withdrawal from a Traditional IRA

You can face costly penalties if you take money out of your traditional IRA before you turn 59 and six months, or if you fail to take enough money out after you turn 72. These are based on rules for early withdrawal and required minimum distributions.

Taking money out before turning 59 and six months means you’ll have to pay 10 percent of your withdrawal amount as a penalty. You’ll also have to pay income taxes on the withdrawal based on your current income tax rate at the time.

There are some exceptions to this early withdrawal penalty, but you or your beneficiary will still have to pay income taxes on any funds withdrawn under these exceptions.

Exceptions to the Traditional IRA Early Withdrawal Penalty
  • Up to $5,000 for adoption of a child
  • Up to $10,000 for a first-time home purchase
  • If you become disabled
  • If you die and a beneficiary withdraws the money
  • Paying for medical expenses that qualify
  • Paying health insurance premiums while you are unemployed
  • Paying higher-education costs that qualify
  • You are in the military and called to active duty for more than 179 days
  • You use the withdrawal to pay an IRS tax judgement against you

You are also required to start making regular withdrawals — called required minimum distributions — every year after you turn 72 or face stiff penalties.

The IRS will determine how much your RMDs are. You have to withdraw that amount each year after you turn 72 — the first time by April 1 in the year after you turn 72. Each year after that, you have to make your required minimum distribution by Dec. 31.

If you don’t make RMDs by the required deadlines, you can face a stiff penalty — 50 percent of the amount of your required minimum distribution.


How Traditional IRAs Work with 401(k) and Other Retirement Plans

If you have a higher income and are covered by a 401(k) or another retirement plan at work, you may be limited in how much of your traditional IRA contributions you can deduct from your income taxes. Your deductions can be reduced or completely eliminated.

These limits are based on your modified adjusted gross income (MAGI) which takes into account your adjusted gross income and adds some of your deductions back in. These limits are adjusted each year and apply only if you or your spouse has a retirement plan through your job.

2020 Traditional IRA Income Limits
Tax Filing StatusMAGI (2020)Deduction
Single or head of household$65,000 or lessFull deduction
Single or head of householdMore than $65,000 but less than $75,000Partial deduction
Single or head of household$75,000 or moreNo deduction
Married filing jointly or qualifying widow(er)$104,000 or lessFull deduction
Married filing jointly or qualifying widow(er)More than $104,000 but less than $124,000Partial deduction
Married filing jointly or qualifying widow(er)$124,000 or moreNo deduction
Married filing separatelyLess than $10,000Partial deduction
Married filing separately$10,000 or moreNo deduction

Alternatives to Traditional IRAs

There are three other types of individual retirement accounts that you may consider as alternatives to a traditional IRA.

Each offers tax advantages of their own that may be a better fit for your retirement planning or financial situation.

Traditional IRA Alternatives
Roth IRA
Roth IRA contributions are not tax deductible, but withdrawals are tax-free six months after your 59th birthday. You make investments into a Roth IRA with after-tax money and do not pay taxes on your investments as they grow.
Simplified employee pension (SEP) IRAs are set up by an employer or self-employed workers. Employers get a tax deduction for contributions they make. It is similar to a traditional IRA but it allows employer contributions.
Small businesses with 100 or fewer workers can set up Savings Incentive Match Plan for Employees (SIMPLE) IRAs. Employees can contribute a maximum of $13,500 in 2020 and the employer can make either the minimum 2 percent contribution or up to an optional 3 percent contribution.

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Last Modified: August 17, 2022

7 Cited Research Articles

  1. Coombes, A. (2020, July 10). What Is a Traditional IRA? Retrieved from https://www.forbes.com/advisor/retirement/traditional-ira/
  2. U.S. Internal Revenue Service. (2020, January 28). Traditional and Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-and-roth-iras
  3. U.S. Internal Revenue Service. (2020, January 15). Traditional IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-iras
  4. U.S. Internal Revenue Service. (2020, January 9). Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
  5. U.S. Internal Revenue Service. (2019, December 4). 2020 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work
  6. Cornell Law School. (n.d.). 26 U.S. Code Section 408 - Individual Retirement Accounts. Retrieved from https://www.law.cornell.edu/uscode/text/26/408
  7. CNN Money. (n.d.). What Is a Traditional IRA? Retrieved from https://money.cnn.com/retirement/guide/IRA_traditional.moneymag/index.htm