Understanding Traditional IRA
3/15/20251 min read
What is a Traditional IRA?
A Traditional IRA offers flexibility and valuable tax advantages, making it a great option for many savers planning for retirement. You can contribute pre-tax or after-tax dollars, and depending on your income, your contributions may be tax-deductible, providing immediate tax savings.
Who Can Benefit from a Traditional IRA?
A Traditional IRA can benefit individuals looking for tax-deferred growth and potential tax deductions. It’s ideal for:
Employees without an employer-sponsored retirement plan, allowing them to save for retirement with possible tax benefits.
Individuals who expect to be in a lower tax bracket in retirement, as withdrawals will be taxed at their future (potentially lower) rate.
High-income earners who don’t qualify for a Roth IRA but still want tax-advantaged retirement savings.
Anyone seeking to supplement their existing retirement savings, even if they have a 401(k) or other plans at work.
Pros:
Tax-Deductible Contributions – Depending on your income and whether you have a workplace retirement plan, you may qualify for tax-deductible contributions, reducing your taxable income.
Tax-Deferred Growth – Earnings grow tax-free until withdrawal, allowing investments to compound over time.
No Income Limits for Contributions – Unlike a Roth IRA, anyone with earned income can contribute, regardless of how much they make.
Wide Investment Options – Offers flexibility in choosing investments like stocks, bonds, ETFs, and mutual funds.
Cons:
Taxes on Withdrawals: Distributions in retirement are taxed as ordinary income, which could be a disadvantage if you're in a high tax bracket.
Required Minimum Distributions (RMDs): Starting at age 73 (as of 2023), you must begin withdrawing a minimum amount each year, even if you don’t need the money.
Early Withdrawal Penalties: Withdrawals before age 59½ may incur a 10% penalty plus income tax unless an exception applies.
Contribution Limits: Annual contribution limits are capped ($7,000 in 2025, or $8,000 if you’re 50+), which may not be enough for some high savers.