Traditional IRA

How Traditional IRAs work

The basic mechanics:

• Contribute pre-tax dollars (deductible if income-eligible).
• Investments grow tax-deferred — no annual tax on gains.
• Withdrawals in retirement taxed as ordinary income.
• Required minimum distributions (RMDs) start at age 73.
• Penalty for withdrawals before age 59½ (with exceptions).

The opposite tax treatment of Roth IRA — pay later, not now.

Traditional vs. Roth

The key distinction:

• Traditional — deduct now, pay tax in retirement.
• Roth — pay tax now, withdraw tax-free.

Choice depends on current vs. expected future tax bracket:

• Higher tax now — Traditional usually better.
• Lower tax now — Roth usually better.
• Uncertainty — split the difference.

Contribution limits

Annual limits (2026):

• $7,000 standard ($8,000 if 50+).
• Same combined Traditional + Roth limit.
• Income limits for deductibility (if covered by workplace plan).
• Spousal IRA — non-working spouse can contribute based on working spouse's income.

Limits adjust periodically for inflation.

Deductibility

Important rule:

• No workplace retirement plan — fully deductible regardless of income.
• Workplace plan — deductibility phases out at higher income.
• Non-deductible contributions — possible but produce complex tax tracking.
• Backdoor Roth strategy — uses Traditional → Roth conversion path.

Most high earners use backdoor Roth instead of direct Traditional.

RMDs

Required minimum distributions:

• Start at age 73 (was 70½, then 72).
• Calculated based on account balance and life expectancy.
• Failure to take — 25% penalty on undistributed amount.
• Force taxable income in retirement whether wanted or not.

RMDs are a major retirement planning consideration.

When to use Traditional

Best fit:

• High current tax bracket — deduction is valuable now.
• Expected lower retirement bracket.
• No workplace plan — full deductibility.
• Need current-year tax reduction.

For many higher earners, Traditional makes sense early career.

What individuals should know

For most workers:

• Either Traditional or Roth IRA is valuable; just contribute.
• Don't agonize over Traditional vs. Roth choice — both work.
• Workplace plan first if matched, IRA second.
• Backdoor Roth if income exceeds direct Roth limits.

Traditional IRAs are foundational US retirement accounts. Their tax structure makes them most valuable for high-current-bracket earners expecting lower retirement income.