# Understanding a Traditional IRA vs. Other Retirement Accounts

> **Definition**
>
> A traditional IRA is a retirement account in which individuals deposit pre-tax contributions and grow the value of their investments tax-deferred until money is withdrawn in retirement.

## What Is a Traditional IRA?

A traditional [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp) allows individuals to deposit pre-tax income into investments that can grow tax-deferred. The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal. Individual taxpayers can contribute from qualified earned compensation.

You can contribute to a traditional IRA no matter how high your income is. However, limitations on deductions may apply, depending on your income, tax-filing status, and other factors. Retirement savers may open a traditional IRA through their broker (including [online brokers](https://www.investopedia.com/best-online-brokers-4587872) or robo-advisors) or financial advisor.

### Key Takeaways

*   Traditional IRAs allow individuals to contribute pre-tax dollars to a retirement account where investments grow tax-deferred until withdrawal during retirement.
*   Withdrawals are taxed at the IRA owner's income tax rate in the year of distribution.
*   Account holders should adhere to annual contribution limits and be aware of the schedules for required minimum distributions.
*   Nonqualified withdrawals from a traditional IRA before the age of 59½ are subject to income tax and a 10% penalty.
*   Unlike Roth IRA contributions, traditional IRA contributions are deductible from your current taxable income.

## How Traditional IRAs Work

Traditional IRAs let individuals contribute pre-tax dollars to a retirement investment account, which can grow [tax-deferred](https://www.investopedia.com/articles/taxes/11/tax-deferred-tax-exempt.asp) until retirement withdrawals occur (at age 59½ or later) when they are taxable income. If you withdraw money before age 59½, it is also subject to a [10% early withdrawal penalty](https://www.investopedia.com/ask/answers/082515/how-do-you-calculate-penalties-ira-or-roth-ira-early-withdrawal.asp) unless you qualify for an exemption. [Custodians](https://www.investopedia.com/terms/c/custodian.asp), including commercial banks and retail brokers, hold traditional IRAs and place the invested funds into different investments according to the account holder’s instruction and the offerings available.

Contributions to traditional IRAs are tax-deductible in most cases. For instance, if someone contributes $7,000 to their IRA in a given year, they can claim that amount as a [deduction](https://www.investopedia.com/terms/t/tax-deduction.asp) on their income tax return, and the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) will not apply income tax to those earnings. However, when that individual withdraws money from the account—presumably during retirement—earnings are taxed at the account owner’s ordinary income tax rate for that year.

The IRS restricts contributions to a traditional IRA each year, depending on the account holder's age. The contribution limit for the 2024 and 2025 tax years is $7,000 for savers under 50 years of age. People aged 50 or above are allowed to contribute up to an extra $1,000—known as a [catch-up contribution](https://www.investopedia.com/terms/c/catchupcontribution.asp)—for a total maximum of $8,000.

Under the SECURE Act of 2019, age restrictions on contributions to a traditional IRA were lifted. You do need allowable taxable earned income, such as wages, salaries, tips, and self-employment earnings. And you can contribute as much as your allowable taxable earned income, up to the overall annual contribution limit, which is $7,000 in 2024 and 2025, plus another $1,000 if you are aged 50 or older.

## Traditional IRAs and 401(k)s or Other Employer Plans

When you have both a traditional IRA and an employer-sponsored retirement plan, the IRS may limit the amount of your traditional IRA contributions that you can deduct from your taxes.

If a taxpayer participates in an employer-sponsored program such as a 401(k) or pension program and files as a single person, they would only be eligible to take the full deduction on a traditional IRA contribution if their [modified adjusted gross income (MAGI)](https://www.investopedia.com/terms/m/magi.asp) is $77,000 for 2024 ($79,000 for 2025). Married taxpayers filing a joint return can take the full deduction if their income is less than $123,000 for the 2024 tax year and less than $126,000 for 2025.

For 2024, the IRS allows no deductions with MAGIs of $87,000 for singles ($89,000 for 2025) and $143,000 ($146,000 for 2025) for married couples. The deduction is gradually reduced—commonly referred to as being “phased out”—depending on where the filer's income falls between the bottom and top of the phase-out range.

IRA contributions must also be made by the tax filing deadline. For most taxpayers, this is on or around April 15 of the year after the calendar year in which the filer earned the allowable taxable income that their contribution came from.

> **Important**
>
> Income tax is ultimately paid on IRA money at the time of withdrawal, subject to the account owner's tax bracket during retirement. Therefore, traditional IRAs are more often recommended for investors who expect to be in lower tax brackets at retirement than they were when they earned the income.

## Traditional IRA Distributions

When you receive distributions from a traditional IRA, the IRS treats the money as ordinary income and subjects it to income tax. Account holders can take distributions as early as age 59½ without penalty.

The age for [required minimum distributions (RMDs)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) from traditional IRAs depends on which year you were born. With a traditional IRA, your RMDs must start at these ages:

*   70½ if you were born before July 1, 1949
*   72 if you were born between July 1, 1949, and December 31, 1950
*   73 if you were born Jan. 1, 1951, through December 31, 1959
*   75 if you were born in 1960 or later

The deadline for taking your RMD is December 31 each year. The deadline for taking your first RMD is April 1 of the year after you turn 73. That’s the only RMD that you can delay in that way.

Funds that are withdrawn before age 59½ [incur a 10% penalty](https://www.investopedia.com/ask/answers/082515/how-do-you-calculate-penalties-ira-or-roth-ira-early-withdrawal.asp) (of the amount withdrawn) and taxes at standard income [tax rates](https://www.investopedia.com/ask/answers/05/marginaltaxrate.asp). There are [exceptions to these penalties](https://www.investopedia.com/articles/retirement/02/111202.asp) for certain situations.

These include the following:

*   You plan to use the distribution towards the purchase or rebuilding of a first home for yourself or a qualified family member (limited to $10,000 per lifetime)
*   You become disabled before the distribution occurs
*   Your beneficiary receives the assets after your death
*   You use the assets for unreimbursed medical expenses
*   Your distribution is part of a [substantially equal periodic payment (SEPP)](https://www.investopedia.com/terms/s/sepp.asp) program
*   You use the assets for higher education expenses or expenses incurred for having or adopting a child
*   You use the assets to pay for medical insurance after you lose your job
*   The assets are distributed as a result of an IRS levy
*   The amount distributed is a return of nondeductible contributions and attributable income
*   You are a military reservist and are called to active duty for more than 179 days

Check with a tax attorney or the IRS to be sure that the particulars of your situation qualify for a waiver of the 10% penalty.

## Traditional IRAs vs. Other IRA Types

Other variations of the IRA include the Roth IRA, SIMPLE IRA, and SEP IRA. The latter two are offered by businesses—SIMPLE IRAs, in particular, are popular among small businesses—while individuals can set up a Roth IRA if they meet the income limitations. These individual accounts can be created through a broker. You can check out some of the best options with Investopedia's list of the [best brokers for IRAs](https://www.investopedia.com/the-best-ira-brokers-8764115).

### Roth IRAs

Unlike a traditional IRA, [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) contributions are not tax-deductible, and qualified [distributions](https://www.investopedia.com/terms/d/distribution.asp) are tax-free. This means you contribute to a Roth IRA using after-tax dollars—money left over after you’ve paid your income tax—but as the account grows, you do not face any taxes on investment gains. Because you paid taxes on your contributions, you can actually withdraw them, penalty-free at any time.

You can also withdraw earnings once you reach age 59½ without being subject to tax or the 10% early withdrawal penalty if you’ve had the Roth IRA for at least five years. If you’re 59½ or older but you’ve had the Roth IRA for less than five years, withdrawn earnings will be subject to tax but not penalties.

If you are under the age of 59½ and your Roth IRA is at least five years old, withdrawn earnings will not be hit by tax if you use the withdrawal (up to $10,000) to buy your first home. If you are under the age of 59½, withdrawals from a Roth IRA you’ve had less than five years are vulnerable to tax and penalty. Still, you may be able to legally dodge the penalty—but not the tax—if one or more exemptions allowed by the IRS apply. Those exemptions include using the withdrawal (up to $10,000) for a first home purchase, qualified education expenses, or certain unreimbursed medical expenses.

Roth IRAs do not have RMDs. If you don't need the money, you don't have to take it out of your account and worry about penalties for failing to do so. You can also pass the money to your heirs if you don't end up needing to use it.

Annual Roth IRA contribution limits are the same as those for traditional IRAs: $7,000 unless you are 50 or older and can qualify for the catch-up contribution, which raises the limit to $8,000 in 2024 and 2025. The catch is that not everyone qualifies to contribute to a Roth IRA. There are income limitations, with contributions gradually phased out as your MAGI increases.

If you earn above those amounts, you can't contribute to a Roth at all.

### SIMPLE and SEP IRAs

[SIMPLE IRAs](https://www.investopedia.com/terms/s/simple-ira.asp) and [SEP IRAs](https://www.investopedia.com/ask/answers/102714/how-does-simplified-employee-pension-sep-ira-work.asp) are benefit plans instituted by an employer. Individuals cannot open them, but self-employed or sole proprietors may. Generally, these IRAs function similarly to traditional IRAs, but they have higher contribution limits and may allow for company matches.

A simplified employee pension (SEP or SEP IRA) is a retirement plan that an employer or self-employed individual can establish. The employer is allowed a tax deduction for contributions made to the SEP plan. Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to receive employer contributions. In fact, it only takes contributions from employers, not employees. A company owner must contribute the same percentage of pay to each worker’s account as they contribute to their own account. Another major benefit it offers employees is that employer contributions are [vested](https://www.investopedia.com/terms/v/vesting.asp) immediately.

A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees. [SIMPLE](https://www.investopedia.com/terms/s/simple.asp) stands for Savings Incentive Match Plan for Employees of Small Employers. Employers can choose to make a 2% retirement account contribution to all employees whether or not the employee contributes. Alternatively, employers can make a matching contribution of up to 3%. That match can be less than 3% as long as it is at least 1% and the employer contributes that lower level in no more than two out of five years.

Employees can contribute a maximum of $16,000 for 2024 and $16,500 for 2025. That contribution cap is increased periodically to account for inflation. Retirement savers age 50 and older may make an additional [catch-up contribution](https://www.investopedia.com/terms/c/catchupcontribution.asp) of $3,500, bringing their annual maximum to $19,500 in 2024 and $20,000 in 2025.

## Opening a Traditional IRA

You can open a traditional IRA as long as you receive taxable compensation during the year in which you want to contribute or your spouse earned taxable compensation, and you will file a joint return. If both you and your spouse have compensation, both parties can open their own traditional IRAs.

A variety of organizations, financial institutions, or brokerage firms can assist in setting up a personal traditional IRA. The account is subject to IRS code requirements, and the custodian of your account (often the brokerage firm you choose, such as Fidelity or Vanguard) will manage the account requirements on your behalf.

Contributions into a traditional IRA can be made in the form of cash, check, or money order. Physical property is not an allowable contribution type. When setting up an account, there is no minimum balance or starting investment required.

## Retirement Security Rule: What It Is and What It Means for Investors

If you are saving for retirement with one or more IRAs, you may be working with a financial advisor. In that case, you should know about a new regulation called the [Retirement Security Rule](https://www.investopedia.com/retirement-security-rule-8663997). Also known as the fiduciary rule, the rule’s purpose is to protect investors from conflicts of interest when receiving [investment advice](https://www.investopedia.com/terms/i/investment-advice.asp) that the investor uses to build retirement savings.

The rule was issued by the [U.S. Department of Labor (DOL)](https://www.investopedia.com/terms/d/dol.asp) on April 23, 2024. It took effect in September 2024. However, a one-year transition period will delay the effective date of certain conditions to 2025.

If an advisor is acting as a fiduciary under the Employee Retirement Income Security Act (ERISA), they are subject to the higher standard—the fiduciary best-advice standard rather than the lower, merely suitable advice standard. Their designation can limit the products and services they are allowed to sell to clients who are saving for retirement.

## What Is the Difference Between a Traditional IRA and a Roth IRA?

The primary difference between a traditional and a Roth IRA is the tax treatment of each account. Traditional IRA contributions are deductible from taxable income when the contributions are made. Earnings are tax-deferred while they remain inside the account. Earnings are taxable when withdrawn. Alternatively, Roth contributions are not deductible but can grow tax-free. Contributions can be withdrawn tax-free at any time. Earnings can be withdrawn tax-free and penalty-free if you follow certain rules.

## What Are the Rules for a Traditional IRA?

There are several rules for a traditional IRA. The maximum contribution amount is set every tax year. The age for [required minimum distributions (RMDs)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) from traditional IRAs depends on when you were born.  

Your RMDs must start at age:  

*   70½ if you were born before July 1, 1949
*   72 if you were born between July 1, 1949, and December 31, 1950
*   73 if you were born Jan. 1, 1951, through December 31, 1959
*   75 if you were born in 1960 or later

The traditional IRA is subject to income taxes and a 10% penalty if unqualified withdrawals occur before 59½ years old. Lastly, your annual contribution to a traditional IRA can be, at most, what you earned in the contribution year.

## What Are the Different Types of IRAs?

The two most common types of IRAs are the traditional IRA and Roth IRA. Less popular types of IRAs include SEP IRAs (often best for self-employed or small business owners), SIMPLE IRAs (often best for small companies that still have numerous employees), or self-directed IRAs (often used by experienced investors seeking specific alternative asset investments).

## What Are the Disadvantages of Traditional IRAs?

As with other retirement savings vehicles, traditional IRA funds withdrawn at the wrong time—too soon, and before the account owner reaches a certain age—trigger taxes and penalties unless exemptions apply. For that reason, account owners typically feel compelled to leave money inside a traditional IRA for years, if not decades. In addition, while traditional IRAs do not grow tax-deferred, once earnings are withdrawn, they are subject to tax.

## Does a Traditional IRA Grow Tax-Free?

No, a traditional IRA does not grow tax-free. Contributions to a traditional IRA receive favorable tax treatment and are often deducted from an employee's taxable income. However, when it is time to withdraw earnings, any growth on the investment is taxable. In the meantime, earnings are tax-deferred. This is the mirror-image treatment of Roth IRAs, where initial investments cannot be deducted from income, but their growth can be withdrawn tax-free at retirement.

## The Bottom Line

One of the more common vehicles used for saving for retirement is the traditional IRA. A traditional IRA allows savers to contribute money into a tax-deferred vehicle using pre-tax (deductible) contributions. Although this investment vehicle can't be accessed until 59½ without taxes and penalties, taxes on the growth of your investment are deferred until then.

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Retirement Topics - IRA Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits).”
>     
> 2.  Internal Revenue Service. “[Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590a.pdf).” Pages 6, 30.
>     
> 3.  Internal Revenue Service. “[Traditional IRAs](https://www.irs.gov/retirement-plans/traditional-iras).”
>     
> 4.  Internal Revenue Service. "[401(k) Limit Increases to $23,500 for 2025, IRA Limit Remains $7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000)."
>     
> 5.  Internal Revenue Service. “[401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000).”
>     
> 6.  Congress.gov. “[Setting Every Community Up for Retirement Enhancement Act of 2019](https://www.congress.gov/116/plaws/publ94/PLAW-116publ94.pdf#page=605).” Pages 133 Stat. 3137, 3148-3149.
>     
> 7.  Internal Revenue Service. "[Traditional and Roth IRAs](https://www.irs.gov/retirement-plans/traditional-and-roth-iras)."
>     
> 8.  Internal Revenue Service. "[Retirement Topics – Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions)."
>     
> 9.  Internal Revenue Service. "[Publication 590-B (2024), Distributions From Individual Retirement Arrangements (IRAs)](https://www.irs.gov/publications/p590b)."
>     
> 10.  Internal Revenue Service. "[Retirement Plan and IRA Required Minimum Distributions FAQs](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs)."
>      
> 11.  Internal Revenue Service. “[Retirement Topics — Required Minimum Distributions (RMDs)](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds).”
>      
> 12.  Internal Revenue Service. "[Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590b.pdf)." Page 7.
>      
> 13.  Internal Revenue Service. "[Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590b.pdf).” Pages 25-28.
>      
> 14.  Internal Revenue Service. "[Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590b.pdf).” Page 29.
>      
> 15.  Internal Revenue Service. “[Retirement Topics - Beneficiary](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary).”
>      
> 16.  Internal Revenue Service. "[IRA-Based Plans](https://www.irs.gov/retirement-plans/ira-based-plans)."
>      
> 17.  Internal Revenue Service. "[Simplified Employee Pension Plan (SEP)](https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep)."
>      
> 18.  Internal Revenue Service. "[SIMPLE IRA Plan](https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan)."
>      
> 19.  Internal Revenue Service. “[COLA Increases for Dollar Limitations on Benefits and Contributions](https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions).”
>      
> 20.  Internal Revenue Service. "[Retirement Topics - SIMPLE IRA Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits)."
>      
> 21.  Internal Revenue Service. “[Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590a.pdf).” Pages 6, 9-10.
>      
> 22.  Federal Register. "[Retirement Security Rule: Definition of an Investment Advice Fiduciary](https://www.federalregister.gov/documents/2024/04/25/2024-08065/retirement-security-rule-definition-of-an-investment-advice-fiduciary)."
>      
> 23.  U.S. Securities and Exchange Commission. "[Investor Alert: Self-Directed IRAs and the Risk of Fraud](https://www.sec.gov/investor/alerts/sdira.html)."