A Traditional IRA gives you a tax deduction today in exchange for paying taxes later. If you expect to be in a lower tax bracket in retirement, or if your income is too high for a Roth IRA, a Traditional IRA can be a smart choice.
How Traditional IRAs Work
With a Traditional IRA, you contribute pre-tax dollars (or deduct contributions on your tax return), the money grows tax-deferred, and you pay ordinary income tax when you withdraw in retirement. It's the mirror image of a Roth IRA.
The key benefit: an immediate tax deduction. If you contribute $7,000 and you're in the 22% tax bracket, you could save $1,540 on this year's taxes.
Contribution Limits (2024)
Key Numbers
- Contribution limit: $7,000/year ($8,000 if age 50+)
- Combined limit: Total contributions to Traditional + Roth IRAs cannot exceed $7,000
- Deadline: Tax Day of the following year (typically April 15)
Tax Deduction Limits
Anyone with earned income can contribute to a Traditional IRA, but the tax deduction depends on your situation:
If you have a workplace retirement plan (401k, 403b, etc.):
- Single: Full deduction if income below $77,000; phases out up to $87,000
- Married filing jointly: Full deduction if income below $123,000; phases out up to $143,000
If you DON'T have a workplace plan:
- Single: Full deduction at any income level
- Married (spouse has workplace plan): Full deduction if income below $230,000; phases out up to $240,000
Required Minimum Distributions (RMDs)
Unlike Roth IRAs, Traditional IRAs require you to start taking withdrawals at age 73 (as of 2024). The IRS wants their tax revenue eventually.
This is an important planning consideration. RMDs can push you into a higher tax bracket in retirement if you have substantial Traditional IRA assets.
When to Choose Traditional Over Roth
Traditional IRA makes sense if:
- You're in a high tax bracket now (32%+) and expect to be lower in retirement
- Your income is too high for Roth IRA contributions
- You need the tax deduction this year for cash flow
- You're older and closer to retirement with a shorter investment horizon
Roth IRA is usually better if:
- You're young and in a lower tax bracket now
- You expect your income to grow significantly
- You value tax-free growth and flexibility
- You want to avoid RMDs
Step-by-Step: Opening a Traditional IRA
- Choose a brokerage. Fidelity, Schwab, and Vanguard all offer excellent Traditional IRA options with no minimums or trading fees.
- Create an account. Select "Traditional IRA" as the account type. Have your SSN, address, and employment info ready.
- Designate beneficiaries. Critical step—don't skip it.
- Link your bank account. Set up ACH transfer for funding.
- Fund the account. Transfer your contribution (up to $7,000 for 2024).
- Choose investments. Target-date funds are a simple, solid choice.
- Track for taxes. Keep records of your contributions for tax filing.
Investment Options
Same as a Roth IRA—the account type doesn't limit your investment choices:
- Target-date funds: Set-it-and-forget-it simplicity
- Total market index funds: Broad exposure at low cost
- Bond funds: Often make sense in tax-deferred accounts since bond interest is taxed at ordinary rates anyway
The Backdoor Roth Strategy
If your income is too high for a Roth IRA, you can use a Traditional IRA as a stepping stone:
- Contribute to a Traditional IRA (non-deductible)
- Convert to Roth IRA shortly after
- Pay taxes only on any gains
This is called a "backdoor Roth." It's legal and commonly used by high earners. Consult a tax professional if you have existing Traditional IRA balances, as the pro-rata rule can complicate things.
Common Mistakes
- Not investing after contributing. Money sitting as cash doesn't grow.
- Early withdrawals. Withdrawals before 59½ typically incur a 10% penalty plus taxes.
- Forgetting about RMDs. Missing RMDs results in a steep 25% penalty.
- Not considering the full picture. If you have both workplace plan and IRA options, coordinate them strategically.
Next Steps
Still deciding between Traditional and Roth? For most people under 40, Roth is typically better. But if you're in a high tax bracket or need the deduction now, Traditional can be the right choice.