Have you ever wondered why smart people live a peaceful and secure retirement life? The reason is very predictable and obvious, but the main factor is their early retirement planning with the help of savings accounts. In this retirement planning phase, there is one of the most reliable options available, which is a traditional IRA.
So, what is a traditional IRA, and how does it work? If you want to make a decent retirement savings while growing it with full control over your money then an traditional IRA is one of the best options. Keeping in mind concerns like this, we are going to break down this topic into simple terms. Let’s start.
What Is A Traditional IRA?
As we have learned about the what is an IRA in our previous article. Traditional IRA is one of the types of an IRA account. It is retirement saving account which facilitates pre-tax income contributions, and these contributions will then grow tax-deferred till the retirement. So, the pre-tax income contributions helps in reducing the overall taxable income.
This account can be useful in the case where you are stuck in a high-rate tax bracket now. And expect to be in a lower one when you retire. The contributions are made based on your income and whether you or your spouse is covered by any workplace retirement plan. This is the most general IRA account which individual uses for the purpose of retirement savings.
Benefits of Traditional IRA
- It offers tax-deferredgrowth using the investment options for compounding returns.
- Contributions are made from pre-tax income that reduce the annuall taxable income.
- Withdrawals are taxed at the time of retirement, sometimes with lower rates.
- Offers a wide range of investment options like stocks and bonds.
- It allows non-working spousal contributions thorugh Spousal IRA.
- Individuals over the age of 50 years can make catch-up contributions to increase the retirement savings.
How A Traditional IRA Account Works?
The working of this savings account is very simple and easy to manage the contributions and investments. The work is given below :-
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Opening An Account
First, you need to open a traditional IRA account with banks, brokers, or any other financial institutions. There are various companies which provides IRA account and provide unique advantages and flexibilities.
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Make Contributions
Then you will start making contributions to the account based on your income amount. These contributions are based on the limits set by IRS.
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Investment
You need to choose an investment option like Mutual Funds, ETFs, Bonds, etc, and your invested earnings will be the additional amount of money you will get at the time of retirement.
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Gross Tax-Deferred
No taxation will be applied on this investment’s earnings. The options you have choosed for the investments will help in growing your savings with time that offers compounding growth.
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Withdrawal After Retirement
With time, the contribution money will increase exponentially. So, when you retire or after the age of 59½ years.
This account allows you to grow your money with investment earnings, significantly promoting long-term growth.
Traditional IRA Eligibility Requirements
There are some eligibility criterians that the person need to fulfill to have a traditional IRA. So the person need to have income source with earned income for the relevant tax year such as wages, salaries, commissions, etc. However, there is not any specific age limit for earners. Individuals over the age of 70 years can also contribute if they a qualified source of income.
Also, if the account holder have an non-working spouse, then the spouse can also contribute through the Spousal IRA in the traditional IRA. This will help in empowering the overall retirement saving and ensure that both spouse have contributed to this money.
The annual contribution limit for an individual under the age of 50 years is $7,000 and for individuals over the age of 50 is $8,000 which is set by the IRS. More about this is mentioned in the nex section. The contributions are only can made by cash or bank transfer not through assets.
If a person qualifies for all these criterias then they can have this comprehensive retirement saving option for tax-deferred growth and high potential of funds. Traditional IRA is one of the most famous option among earner to ensure a safe and secured financial future.
Contribution Limits of Traditional IRA In 2025
The contribution limit is the annual amount of money that an individual can deposit in their retirement savings account. For 2025, the contribution limit is around $7000 for the individuals under the age 50 and if you are over the age 50 then the contribution limit is $8000 annually.
There is a note in this. These limits are per individual, not per account. Meaning if you have more than one account, like one Roth IRA and one traditional IRA, then the contribution limit is based on both combined deposits. This will help in controlling the access over the contributions to ensure fair allowance to all earners.
For example, if you have a Roth IRA account and a traditional IRA account, then the total combined contribution will be up to $7000 if you are under the age of 50 years.
Withdrawal Rules
There is a set of rules present for traditional IRA withdrawals. Reviewing and implementing these rules can help prevent any penalties and fees. The rules are :-
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Withdrawal After The Age 59½
If you withdraw funds after the age of 59½ years, then no penalty is applicable. This is because, similar to many retirement saving accounts, this account also follows the age barrier after which the normal or penalty-free withdrawal can be made.
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Withdrawal After The Age 59½
In this case, you need to pay a 10% early withdrawal penalty, with the taxation applied as usual.
This is a rule which is not present in the 401(k), with this you need to start withdrawing funds after the age of 73 years, whether you need or not.
Failing to take your RMD can result in facing a 25% penalty as a RMD penalty.
Is A Traditional IRA The Same As A 401(k)?
Instead of a similarity of tax-deferred retirement savings, a 401(k) and a traditional IRA are different in many aspects, which are listed below :-
| Feature | Traditional IRA | 401(k) |
| Who Can Open | Anyone with earned income | Only through an employer |
| Contribution Limit (2025) | $7,000 / $8,000 (50+) | $23,000 / $30,500 (50+) |
| Investment Choices | Broad – self-directed | Limited by plan |
| Matching Contributions | No | Often Yes |
| RMDs | Begin at 73 | Begin at 73 |
While both accounts aim for the same goal, the difference is generated based on the needs of an individual and the properties of these savings accounts that align with their planning.
Looking to diversify beyond IRAs? Learn How to invest 401(k) in Real Estate and unlock new growth opportunities for your retirement!
Why Would Anyone Use A Traditional IRA?
In the mesh of a lot of retirement saving accounts present, the traditional IRA reserves a special space due to its nature and flexibility. This account helps you in reducing the taxable income because you will contribute from the pre-tax income, so that the gross income will get reduced, and the remaining income is subject to tax implications.
Also, if we are talking about taxation, then this account facilitates tax-deferred earnings on which taxation is not applicable. There are no income limits present, so anyone who is earning can open a traditional IRA account and start their retirement saving.
This is considered the most favourable option for rolling over the account into another account in the case of changing jobs. Plus, it provides great retirement flexibility.
Best Account Providers
Making an effective retirement savings account is highly dependent on what provider or financial institution you choose. Take wise decisions based on the factors you are dealing with.
There are some top traditional IRA account providers mentioned :-
- Fidelity : Low-cost, excellent tools, wide range of investments
- Vanguard : Great for index fund investors
- Charles Schwab : Strong customer service and platform
- Betterment/Wealthfront : Great for beginners and hands-off investing
- Merrill Edge : Good for Bank of America customers
Conclusion :-
A traditional IRA is an excellent option for those who want to secure their retirement life with full control over savings and flexibility for distribution. This saving account provides pre-tax contributions and growth to the deposited money using investments in various ways like ETF, Bonds, Mutual Funds, etc.
There is a annual contribution limits present which is $7000 for individuals under the age 50 years and $8000 for individuals over the age of 50 years. Also, there will be an early withdrawal penalty of 10% applied in the case where you withdraw before the age of 59½ years. This can be a good and wise decision for those who want to secure their financial future.
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Frequently Asked Questions
Are traditional IRA safe?
Yes, a traditional IRA is considered one of the most reliable and secure ways to save for retirement. Also, it is chosen by many individuals who want to elevate their savings and live their lives peacefully.
Is traditional IRA taxable?
As we know, the contribution made in a traditional IRA is from pre-tax income or gross income, but when you withdraw, then it is needed to pay the tax because withdrawal from this account is considered as a normal taxable income.
At what age is IRA withdrawal tax-free?
It is not possible to withdraw from a traditional IRA without paying taxes, but if you withdraw after the age of 59½ years, then you don’t need to face the 10% early withdrawal penalty.
Who is eligible for traditional IRA?
Traditional IRA is available for all those individuals who have an earning income or related spouse for which you are filling tax jointly.
