{"menuItems":[{"label":"What is a traditional IRA?","anchorName":"#what-is-a-traditional-ira"},{"label":"How does a traditional IRA work?","anchorName":"#how-does-a-traditional-ira-work"},{"label":"How to open a traditional IRA","anchorName":"#how-to-open-a-traditional-ira"},{"label":"Traditional IRA investment options","anchorName":"#traditional-ira-investment-options"},{"label":"Traditional IRA rules you need to know","anchorName":"#traditional-ira-rules-you-need-to-know"},{"label":"Can I have an IRA and a 401(k)?","anchorName":"#can-i-have-an-ira-and-a-401-k"},{"label":"Benefits and drawbacks of traditional IRAs - are they worth it?","anchorName":"#benefits-and-drawbacks-of-traditional-iras---are-they-worth-it"},{"label":"Bottom line","anchorName":"#bottom-line"},{"label":"Compare brokerages that offer traditional IRAs","anchorName":"#compare-brokerages-that-offer-traditional-iras"},{"label":"Frequently asked questions","anchorName":"#frequently-asked-questions"}]}
A traditional individual retirement account (IRA) is an investment account that offers tax benefits to retirement savers. These accounts are available to anyone with earned income, regardless if they have a workplace retirement plan, but they have some limitations and restrictions.
Read on to learn more about traditional IRAs, how they work and how to open one of these retirement accounts.
Traditional IRAs at a glance
Traditional IRA contributions can lower your taxable income.
Qualified distributions are taxed based on your income tax bracket in retirement.
Non-qualified withdrawals are subject to regular taxes plus a 10% penalty.
What is a traditional IRA?
A traditional IRA is a type of IRA that lets you delay taxes on money you save for retirement. Your contributions and any earnings you make on your investments over time are tax-deferred, meaning you don’t pay taxes on this money until you begin taking withdrawals in retirement. Since taxes are delayed, traditional IRAs may be ideal if you think you’ll be in a lower-income tax bracket at retirement.
The traditional IRA also offers retirement savers an upfront tax benefit in the form of a tax deduction. Traditional IRA contributions are tax-deductible in the year in which the contributions are made. So if you contribute $3,000 to a traditional IRA in 2023, you may be able to deduct $3,000 from your taxes when you file in 2024. Allowable deductions vary depending on your income and whether you contribute to a retirement plan at work.
How does a traditional IRA work?
A traditional IRA operates as a tax-advantaged investment account, offering tax benefits as you invest in assets such as stocks, bonds, exchange-traded funds (ETFs) and mutual funds. Banks, brokerage firms and other financial institutions approved by the Internal Revenue Service (IRS) to custody IRA assets can offer traditional IRAs, and anyone with earned income can open and fund one of these accounts.
Contributions to a traditional IRA may be tax-deductible in the year in which you contribute. The amount you can deduct varies depending on your modified adjusted gross income (MAGI) and whether you’re covered by a retirement plan at work.
The IRS sets the IRA contribution limits each year. IRA contribution limits are subject to an annual cost-of-living (COLA) adjustment. In 2023, you can contribute up to $6,500 to an IRA. This is up 8.3% from the 2022 limit of $6,000. Contributions over the limit set by the IRS are considered excess contributions and can result in a 6% yearly tax on the excess amounts left in your account. You have up until the due date of your tax return to withdraw excess contributions.
Come retirement, traditional IRA withdrawals are subject to ordinary income tax. Withdrawals before the age of 59 and a half are subject to both income taxes and a 10% early-withdrawal penalty.
Traditional IRA eligibility
Anyone with earned income can open and contribute to a traditional IRA. There are no age or income limits.
However, the IRS does limit the amount of your IRA contributions that you can deduct each year depending on whether you’re covered by a retirement plan at work.
If you’re covered by a workplace retirement plan:
Are single or head of household and your MAGI is $73,000 or less, you can deduct the full amount of your traditional IRA contribution. You’re allowed a partial deduction if your income is more than $73,000 and no deduction once your income exceeds $83,000.
Are married filing jointly and your MAGI is $116,000 or less, you can deduct the full amount of your traditional IRA contribution. You’re allowed a partial deduction if your income is more than $116,000 and no deduction once your MAGI exceeds $136,000.
If you’re not covered by a workplace retirement plan, you can deduct the full amount of your contribution regardless of your MAGI. Married couples filing jointly can claim the full deduction so long as neither spouse is covered by a retirement plan at work.
Traditional IRA contributions — how much can you deposit?
Anyone with earned income can contribute up to $6,500 ($7,500 if age 50 or older) in an IRA in 2023. If less, your taxable income for the year. The $6,500 limit is the total you can contribute to all your traditional or Roth IRAs.
Traditional IRA taxes
You fund your traditional IRA with pre-tax dollars, and contributions to the account may be tax-deductible. Meanwhile, earnings in the account — things like investment gains, interest or dividends — grow tax-deferred. This means that your retirement savings accumulate tax-free until you withdraw money from the account.
Non-qualified distributions — distributions before the age of 59 and a half — incur a 10% early-withdrawal penalty on top of the normal tax you’d have to pay for withdrawing funds from the account.
How to open a traditional IRA
Choose a traditional IRA custodian. Explore and compare IRA custodians, considering things like investment options, fees, customer support and platform functionality.
Complete your application. Most IRA custodians offer simple online application processes. Be prepared to supply personal information, such as your name, date of birth and Social Security number.
Fund your account. Fund your traditional IRA with a check or bank transfer. If you have an existing retirement account, you may be able to roll over those funds into your new IRA.
Select your investments. Choose from stocks, bonds, ETFs or any other assets available with your IRA custodian.
Though most assets are permissible in an IRA, each IRA custodian determines which investments are made available to customers. Most major banks and brokers limit IRA investment options to traditional assets such as stocks, bonds, mutual funds and ETFs. In some cases, options and futures. To diversify your IRA with alternative investments like crypto, real estate and gold, find a custodian that offers self-directed IRAs.
Traditional IRA rules you need to know
From allowable investments to mandatory distributions, traditional IRAs have some rules you should know.
You have until April to contribute to an IRA for the previous year. Fund an IRA any time between January 1 and the tax-filing deadline of the following year. For tax year 2023, you have until April 2024 to contribute to an IRA. Mandatory withdrawals beginning at ages 72 and 73. You must start taking distributions from your traditional IRA the year you turn 72 years old (73 if you reached 72 after December 31, 2022).
Withdrawals before age 59 and a half can be penalized. Unless you qualify for an exception, you’ll have to pay a 10% penalty if you withdraw money from your traditional IRA before you’re 59 and a half. Using funds for a first-time home purchase or for certain qualified higher education or medical expenses are examples of exceptions.
Lastly, the law prohibits investing IRA funds in life insurance and collectibles. Most assets are allowed in an IRA, but life insurance and collectibles are off the table. Examples of collectibles include artwork, antiques and wine.
IRAs at a glance
Traditional
Roth
SEP (Simplified Employee Pension)
SIMPLE (Savings Incentive Match Plan for Employees)
Self-directed
Who it’s for
You want to deduct your contribution
You think you’ll be in a lower-income tax bracket in retirement
You’re under the income limit threshold
You think you’ll be in a higher income tax bracket in retirement
Business owners with or without employees who want tax-deductible contributions
Small business owners not currently sponsoring a retirement plan
You want to invest in both traditional and alternative assets
Max contribution per year
$6,500 ($7,500 if you’re age 50 or older)
$6,500 ($7,500 if you’re age 50 or older)
Business owners can contribute up to the lesser of $66,000 or 25% of an employee’s salary
Employees can contribute up to $15,500 from their salary
Employers are required to match each employee’s elective-deferral contributions, dollar-for-dollar, up to 3% of the employee’s compensation
Contribution limits depend on whether the IRA functions as a traditional, Roth or SEP IRA
Are contributions tax-deductible?
Yes, but your eligibility and the amount you can deduct depends on your tax filing status, MAGI and whether you have a workplace retirement plan
No
Yes, employers can deduct the lesser of their contributions or 25% of the employee’s compensation
Not for employees
Business owners can deduct all contributions made to an employee’s SIMPLE IRA
Sole proprietors can deduct their own salary reduction contributions and their own matching or nonelective contributions
The same tax deduction rules for standard traditional, Roth, SEP and SIMPLE IRAs apply
Can I have an IRA and a 401(k)?
Yes, you can have an IRA and a 401(k) and many people do. You can contribute up to each account’s maximum contribution limit each year, though 401(k) contributions can limit how much you can deduct from your traditional IRA.
Here are some reasons why you should have an IRA and a 401(k):
IRAs allow most asset types, while 401(k)s are mostly limited to mutual funds.
Many 401(K)s come with an employer match, which is essentially free money. Except for Robinhood’s 1% IRA match, most IRAs don’t offer matching contributions.
You want variety in how your retirement savings are taxed. If you have a traditional 401(k) through work, you may decide to open a Roth IRA to get tax-free withdrawals in retirement.
Benefits and drawbacks of traditional IRAs – are they worth it?
Pros
Easy to set up
No income limit to open and contribute
Tax deductions give you a tax break today
Wide range of allowable investments
Certain exceptions let you avoid the 10% early-withdrawal penalty
Cons
Relatively low contribution limits
Tax deductibility limited if you’re covered by a workplace retirement plan
Required minimum distributions
A 10% penalty typically applies for non-qualified distributions
Bottom line
A traditional IRA is a type of tax-advantaged investment account that offers financial incentives for saving for retirement. These include deductible contributions and the ability to defer paying taxes on your investments until you reach retirement, making it a good option if you expect to be in a lower income tax bracket in retirement.
Compare brokerages that offer traditional IRAs
Narrow down top brokers by annual fee, stock trade fee and more to find the best for your budget and financial goals.
1 - 7 of 7
Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.
Finder is not an adviser or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Frequently asked questions
A traditional IRA is a retirement account you open yourself and fund with pre-tax dollars. Earnings on your investments grow tax-deferred, and you don't have to pay taxes on the money in your account until you make withdrawals in retirement.
A traditional IRA is one type of IRA. Other types of IRAs include Roth IRAs, SEP IRAs and SIMPLE IRAs.
Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser Disclosure
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
Finder Award
