What Is a Traditional IRA?

A traditional individual retirement account (IRA) is an investment account that allows your retirement savings to grow tax deferred with potentially tax-deductible contributions. Although some IRA rules such as the contribution limits are modified annually, others remain constant. However, starting in 2023, the SECURE 2.0 Act will make changes to some traditional IRA rules.

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 35 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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    Lamia Chowdhury
    Lamia Chowdhury, editor for RetireGuide.com

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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  • Financially Reviewed By
    Toby Walters, CFA®
    Toby Walters, CFA

    Toby Walters, CFA®

    Chartered Financial Analyst and Paraplanner

    Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.

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  • Published: September 21, 2020
  • Updated: October 6, 2023
  • 5 min read time
  • This page features 12 Cited Research Articles
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APA Turner, T. (2023, October 6). What Is a Traditional IRA? RetireGuide.com. Retrieved June 17, 2024, from https://www.retireguide.com/retirement-planning/investing/accounts/ira/traditional/

MLA Turner, Terry. "What Is a Traditional IRA?" RetireGuide.com, 6 Oct 2023, https://www.retireguide.com/retirement-planning/investing/accounts/ira/traditional/.

Chicago Turner, Terry. "What Is a Traditional IRA?" RetireGuide.com. Last modified October 6, 2023. https://www.retireguide.com/retirement-planning/investing/accounts/ira/traditional/.

Key Takeaways
  • The money kept in your traditional IRA grows tax deferred.
  • When you make your required minimum distributions (RMDs) at age 73, the amount withdrawn becomes taxable.
  • There’s a yearly limit to how much you can contribute to your traditional IRA.

How Do Traditional IRAs Work?

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.

When Your Traditional IRA is Partially or Fully Deductible
Your deduction is partially deductible if:
You or your spouse have a retirement plan through your jobs and your income falls within a certain range. For example, if you’re filing as single and make between $73,000 and $83,000 annually, you can take a partial deduction. The IRS has a table showcasing 2023 Traditional IRA Deduction Limits.
Your deduction is fully available if:
You or your spouse aren’t covered by a retirement plan at your work. You can earn any amount of income and your deductible will still be fully available.

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.

Traditional IRA Rules and Penalties

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.

2023 Traditional IRA Contribution and Distribution Rules
Contribution Limits
Your annual contributions can’t be more than $6,500 (or $7,500 if you’re over 50 years old).
Distribution Rules
If you try to take distributions from your IRA and you’re under 59 1/2 years old, your distribution will generally be included in your taxable income and potentially subject to a 10% additional tax.

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.

How To Open a Traditional IRA

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.

How Does a Traditional IRA Compare to Other IRAs?

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.

Traditional IRAs vs. Other IRAs

Traditional IRA
Tax Rules
Your contributions are tax deductible and your withdrawals are taxed as income.
Annual Contribution Limits
$6,500 (or $7,500 if you’re over 50)
RMD Rules
RMDs are required once you turn 73.
Who It’s Intended For
Individuals of any age with any amount of income looking to bulk up their retirement savings. Traditional IRAs offer an upfront tax advantage.
Roth IRA
Tax Rules
Your contributions are made with after-tax funds and therefore aren’t tax deductible. Your earnings and withdrawals are tax-free.
Annual Contribution Limits
$6,500 (or $7,500 if you’re over 50)
RMD Rules
RMDs are only required after the owner of the account has passed away. Starting in 2024, RMDs won’t be required at all for Roth IRAs.
Who It’s Intended For
Individuals of any age looking to bulk up their retirement savings. There may be limits to how much you can contribute if you make above a certain amount. Roth IRAs offer a delayed tax benefit.
Roth IRA vs. Traditional IRA
SEP IRA
Tax Rules
Your contributions are tax deductible and your withdrawals are taxed as income.
Annual Contribution Limits
Either 25% of your compensation or $66,000, whichever is less
RMD Rules
RMDs are required once you turn 73.
Who It’s Intended For
Those who own a small business or are self-employed.
SIMPLE IRA
Tax Rules
Your contributions are tax deductible and your withdrawals are taxed as income.
Annual Contribution Limits
$15,500 (or $19,000 if you’re over 50)
RMD Rules
RMDs are required once you turn 73.
Who It’s Intended For
Small businesses that don’t have a retirement savings plan. There are eligibility requirements to consider. These accounts are known to have affordable administration and lower contribution limits than 401(k) plans.

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.

Last Modified: October 6, 2023

12 Cited Research Articles

  1. Internal Revenue Service. (2023, March 14). Retirement Plan and IRA Required Minimum Distributions FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
  2. Internal Revenue Service. (2023, January 5). SEP Plan FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
  3. Internal Revenue Service. (2022, October 26). 2023 IRA Deduction Limits - Effect of Modified AGI on Deduction If You Are Covered by a Retirement Plan at Work. Retrieved from https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
  4. Internal Revenue Service. (2022, October 26). Retirement Topics - SIMPLE IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits
  5. Internal Revenue Service. (2022, October 26). Amount of Roth IRA Contributions That You Can Make For 2023. Retrieved from https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
  6. U.S. Securities and Exchange Commission. (n.d.). Individual Retirement Accounts (IRAs). Retrieved from https://www.investor.gov/additional-resources/retirement-toolkit/self-directed-plans-individual-retirement-accounts-iras
  7. Internal Revenue Service. (2023). Retirement Topics - IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  8. Internal Revenue Service. (2022, October 26). IRA Deduction Limits. Retrieved from https://www.irs.gov/retirement-plans/ira-deduction-limits
  9. Internal Revenue Service. (2022, September 19). Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
  10. Internal Revenue Service. (n.d.). IRA FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras
  11. Internal Revenue Service. (n.d.). IRA FAQs - Distributions (Withdrawals). Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals
  12. Wells Fargo. (n.d.). IRA – Frequently Asked Questions. Retrieved from https://www.wellsfargo.com/help/investing-and-retirement/ira-faqs/