What Is a Traditional IRA?

Traditional IRAs can help you grow your retirement funds in three different ways: you will earn compounded interest over time on the money you deposit, you can hold investments within your IRA, and you’ll pay no taxes on your earnings until you start making withdrawals.

Any contributions you make to your traditional IRA can be fully or partially deductible depending on your filing status and your income. You’ll only pay taxes on your gains once you make withdrawals, which you’re required to take once you turn 73.

Unlike a Roth IRA, there are no income limits for opening a traditional IRA. You can earn any level of income and choose to invest in a traditional IRA.

You also have the option to invest the funds within your traditional IRA to further grow your savings. For example, with Wells Fargo, you can invest in stocks, bonds, Exchange-Traded Funds (EFTs) and mutual funds in your IRA.

There’s an annual limit to how much you can contribute to your traditional IRA and a 10% penalty if you take a distribution before you reach a certain age.

You must start taking required minimum distributions (RMDs) from your traditional IRA at a specific age. The SECURE 2.0 Act increased the age from 72 to 73 in 2023. Any amount you withdraw will be taxed at your current income tax rate.

The SECURE 2.0 Act also waives the 10% early additional tax from IRAs if a physician diagnoses you with a terminal illness.

You can open a traditional IRA at a bank, credit union, life insurance company or through a mutual fund or stockbroker. Check for maintenance or transaction fees and ensure the issuer meets your needs.

You can open your traditional IRA account online or in person, depending on your issuer. Before opening your account, you’ll need to determine your beneficiary and preferred contribution method. You should also have your banking information and Social Security number ready.

The time it takes to apply for a traditional IRA varies depending on where you open the account. If the process seems confusing, you can contact a financial advisor to help you set up your traditional IRA.

Traditional IRAs compare to other IRAs based on their varying tax rules and qualifications. There are three other common types of IRAs to consider — a Roth IRA, Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA.

You don’t have to be stuck with one type of IRA forever. Your traditional IRA can be converted into a Roth IRA if you think you’d want tax-free withdrawals later in retirement.

If you don’t find any type of IRA to suit your needs, you can consider other alternatives, like a 401(k), 403(b) or a Thrift Savings Plan, all of which are employer-sponsored retirement plans.