What is a traditional IRA?
A traditional Individual Retirement Account (IRA) is an account where you can contribute pre-tax or after-tax dollars. This means you may have immediate tax benefits, depending on your circumstances. However, all traditional IRA holders benefit from tax deferred growth. There are also no maximum income limitations with a traditional IRA like there are with a Roth IRA, but you must have earned income. A traditional IRA can be a good investment option for those who expect they'll be in the same or a lower tax bracket when they retire.
How does a traditional IRA work?
Savings can grow, tax deferred:
Your money stays invested in your account without being taxed. When you withdraw your money, you'll be taxed based on your income at this time.
Can you move your money from a traditional IRA to a Roth IRA?
The short answer is yes but there are some important considerations to that decision, namely it cannot be undone. Please consult a tax professional in order to understand the tax implications.
What are the key features of a traditional IRA?
In addition to the possible tax advantages, a traditional IRA lets you:1
- Have investments that grow tax-deferred-You're not taxed on the money until you withdraw it.
- Get access to a broad range of investment options to help meet your needs.
- Consolidate other qualified accounts into the IRA, so your savings are in one spot, which can help streamline your retirement savings.
- Save in an IRA even if you already have an employer plan, like a 401(k).
What are the contribution rules?
As long as you're still earning income, you can contribute to a traditional IRA.
Already have a 401(k)?
Although 401(k)s (retirement plans through an employer) and IRAs (retirement accounts you own yourself) are similar in that both are used to save money for retirement, they have their own distinct rules for contributing.
That means you can contribution to either or both each year, up to the maximum contribution limits for each.2
Traditional or Roth IRA?
A traditional IRA lets you deduct savings contributions form your taxes, which lowers your taxable income for the year - but you pay taxes on the money when you withdraw it in retirement.
A Roth IRA uses after-tax money, meaning you pay taxes on your contributions at the time you put the money in and, future withdrawals are tax free as long as you follow Roth IRA rules.3
| Traditional IRA | Roth IRA |
|---|---|
| Are there income limits? | |
|
You must have earned income, but there’s no maximum limit.1 |
To contribute the full amount allowed by the IRS in 2024, your modified Adjusted Gross Income (MAGI) must be below:
|
| How much can you contribute? | |
|
Up to $7,000; if you’re 50 or older, you can contribute an additional $1,000 in 2024. |
|
| When do you pay taxes? | |
|
In retirement, when you withdraw your savings. |
Up front, before you contribute. Your earnings then grow tax free. There are no taxes or penalties on withdrawals made after age 59½.3 |
| Are there rules around withdrawing your money? | |
|
You can withdraw contributions and earnings penalty-free at age 59½, or earlier for certain hardships. You have to start taking required minimum distributions at age 73. |
You can withdraw contributions at any time, without penalty. You can withdraw earnings penalty-free at age 59½, or earlier for certain hardships, as long as you've followed the rules of a Roth IRA. 3 You're not required to withdraw your money at any age. |
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