A Traditional IRA (Individual Retirement Account) is a retirement savings account that allows individuals to set aside money for retirement in a tax-advantaged manner. It is one of the most popular retirement accounts in the United States, offering significant benefits for long-term savings and tax deferral. The Traditional IRA is designed to encourage individuals to save for retirement by providing tax advantages on contributions and earnings. With tax-deferred growth and the potential for tax-deductible contributions, the Traditional IRA serves as a powerful tool for building retirement savings.
Key Features of a Traditional IRA
One of the standout features of a Traditional IRA is its tax-deferred growth. Investments in a Traditional IRA grow without being taxed on dividends, interest, or capital gains until funds are withdrawn in retirement. This tax deferral can lead to larger wealth accumulation over time compared to taxable accounts. Additionally, contributions to a Traditional IRA are often tax-deductible, meaning individuals can reduce their taxable income for the year by the amount they contribute, up to an annual limit. However, eligibility for full deductions depends on factors such as income, filing status, and whether the individual or their spouse is covered by a workplace retirement plan.
The IRS sets annual limits on how much can be contributed to a Traditional IRA. For 2025, the contribution limit is $6,500 per year for individuals under 50, and $7,500 per year for those 50 or older, due to a “catch-up” provision. These limits apply to the total amount contributed across all IRAs, not just a single account. Additionally, the Secure Act of 2019 removed the previous age limit for contributions, allowing anyone with earned income to contribute to a Traditional IRA, regardless of age, as long as they meet the contribution requirements.
Once individuals reach age 73 (as of 2025), they must begin withdrawing a minimum amount from their Traditional IRA, known as Required Minimum Distributions (RMDs). These withdrawals are taxed as ordinary income, ensuring the government eventually collects taxes on funds that have grown tax-deferred over the years.
Benefits of a Traditional IRA
The benefits of a Traditional IRA are particularly attractive for individuals looking to reduce their current taxable income and grow their retirement savings. One of the main advantages is the ability to make tax-deductible contributions, which can lead to significant tax savings, especially for individuals in higher income brackets. Additionally, the tax-deferred growth allows investments to grow more quickly than in taxable accounts, where earnings would be taxed annually.
Another advantage of a Traditional IRA is the potential for lower tax rates in retirement. Ideally, when funds are withdrawn in retirement, individuals may be in a lower tax bracket than when they made their contributions, allowing them to pay taxes at a lower rate and increase their net income during retirement. Furthermore, Traditional IRAs offer a wide range of investment options, including stocks, bonds, mutual funds, ETFs, and more. This flexibility allows investors to tailor their portfolios to their risk tolerance, financial goals, and time horizon.
Withdrawals and Taxation
Withdrawals from a Traditional IRA are subject to ordinary income taxes. If funds are withdrawn before age 59½, a 10% early withdrawal penalty is typically applied in addition to the regular income tax on the withdrawn amount. However, there are exceptions to the penalty, such as for first-time homebuyers, qualified education expenses, or in the case of disability. Even in these situations, income taxes will still apply to the withdrawn funds.
Traditional IRA vs. Roth IRA
While both Traditional IRAs and Roth IRAs are designed to help individuals save for retirement, there are key differences between the two accounts. Contributions to a Traditional IRA are tax-deductible, but withdrawals are taxed as ordinary income in retirement. In contrast, Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free. Additionally, Traditional IRAs require account holders to begin taking RMDs at age 73, whereas Roth IRAs do not have RMDs during the account holder’s lifetime. Roth IRAs also have income limits for contributions, whereas Traditional IRAs do not have income limits for eligibility to contribute, though tax deductibility may be limited based on income.
Conclusion
A Traditional IRA is a powerful tool for retirement savings, offering the potential for immediate tax deductions and long-term tax-deferred growth. While it has some restrictions, such as RMDs and early withdrawal penalties, it can still play a key role in securing a financially comfortable retirement. For individuals looking to reduce their taxable income today and benefit from compound growth over time, a Traditional IRA remains a valuable option to help achieve their retirement goals.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Katherine Sullivan, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
