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The tax-deferred account that lowers your bill today.
A Traditional IRA is a retirement account you open on your own — separate from any employer plan. Contributions are often tax-deductible, meaning you could pay less in taxes the year you contribute. Your investments then grow tax-deferred until you start taking withdrawals in retirement.
The trade-off: unlike a Roth IRA, you will pay taxes when you withdraw. Every dollar out is treated as ordinary income. The bet you're making is that your tax rate in retirement will be lower than it is today.
If you qualify for the deduction, your contribution reduces your taxable income today. If not, you still contribute after-tax — but growth is still tax-deferred.
Like a 401(k), you pay no taxes on dividends, interest, or capital gains while the money stays inside the account.
Every dollar you withdraw — contributions and earnings — is taxed as ordinary income at your tax rate in retirement.
The IRS forces withdrawals starting at age 73. The amount is calculated based on your account balance and life expectancy.
| Who | Annual Limit |
|---|---|
| Under age 50 | $7,000 |
| Age 50 and older (catch-up) | $8,000 |
The $7,000/$8,000 limit is shared across ALL your IRAs (Roth + Traditional combined).
It depends on whether you (or your spouse) have a workplace retirement plan and your income level.
| Situation | Phase-Out Range (MAGI) |
|---|---|
| Single, covered by workplace plan | $79,000 – $89,000 |
| Married filing jointly, covered by plan | $126,000 – $146,000 |
| Married, spouse covered (you're not) | $236,000 – $246,000 |
| No workplace plan (any income) | Fully deductible |
Above the phase-out range, contributions are non-deductible but still allowed.
Key Insight: If you're in a high tax bracket today and expect to be in a lower one in retirement, getting the deduction now and paying taxes later is the better deal. High earners who can't contribute to a Roth IRA directly often prefer the Traditional IRA for this reason.
Common Mistake: Withdrawing before age 59½ triggers a 10% early withdrawal penalty on top of ordinary income taxes. There are exceptions (first-time home purchase, disability, certain medical expenses), but in general — don't touch it early.
An individual retirement account where contributions may be tax-deductible. Your money grows tax-deferred and withdrawals in retirement are taxed as ordinary income.
If you qualify, you can deduct your Traditional IRA contribution from your taxable income, reducing your tax bill for the year you contribute.
Starting at age 73, the IRS requires you to withdraw a minimum amount from your Traditional IRA each year, whether you need the money or not.
If you or your spouse has a workplace retirement plan, your ability to deduct Traditional IRA contributions phases out above certain income levels.
| Feature | 401(k) | Roth IRA | Traditional IRA |
|---|---|---|---|
| Who opens it | Employer | You | You |
| 2025 limit | $23,500 | $7,000 | $7,000 |
| Tax on contributions | Pre-tax | After-tax | Pre-tax (if eligible) |
| Tax on withdrawals | Taxed as income | Tax-free | Taxed as income |
| Employer match? | Yes | No | No |
| RMDs required? | Yes, at 73 | No | Yes, at 73 |
| Income limits? | No | Yes | Deduction only |
Quick Summary
- Contributions may be tax-deductible depending on income and workplace plan
- Money grows tax-deferred — no taxes until withdrawal
- 2025 limit: $7,000 (or $8,000 if 50+), shared with Roth IRA
- Withdrawals in retirement are taxed as ordinary income
- RMDs required starting at age 73
- Best when you expect a lower tax rate in retirement than today
Module 1 Complete! You now know the three core retirement accounts. Ready to learn how to maximize them?