Traditional IRA

A traditional IRA is the original individual retirement account, created so workers could save for retirement with tax advantages outside an employer plan. The deal is tax deferral: a contribution may be deducted from your taxable income today, the investments compound without annual tax on dividends or gains, and the IRS collects when you withdraw, taxing distributions as ordinary income. You open one at any brokerage, choose your own investments, and contribute in any year you have earned income; there is no longer any age cutoff for contributing.

The deduction is where traditional IRAs get complicated. If neither you nor your spouse is covered by a workplace retirement plan, your contribution is fully deductible no matter how much you earn. If you are covered by a plan at work--a 401(k), 403(b), or similar--the deduction phases out once your income passes annually adjusted thresholds, and a higher set of thresholds applies when only your spouse is covered (current ranges are on IRS.gov). Above the ranges you can still contribute, but the contribution is nondeductible and must be tracked on Form 8606 so that basis isn't taxed twice on the way out. Nondeductible contributions are also the raw material for the backdoor Roth IRA strategy.

Withdrawals before age 59 1/2 are generally taxed and hit with a 10% penalty, with exceptions for cases such as higher-education expenses, a first home purchase (within a dollar cap), and disability. On the back end, the account has a hard deadline: required minimum distributions begin at age 73 under current law, shifting to 75 for people born in 1960 or later. That mandatory drawdown is the sharpest contrast with a Roth IRA, which has no lifetime RMDs. In practice, the traditional-versus-Roth choice comes down to marginal tax rates: a deductible traditional contribution wins when your rate today is higher than the rate you expect to pay in retirement, and loses when the reverse is true.

A hypothetical example: Dev, 45, earns $95,000, has no retirement plan at work, and contributes $7,500 to a traditional IRA in 2026. The full contribution is deductible, so if his marginal federal rate is 22%, the contribution reduces this year's tax bill by $1,650. The out-of-pocket cost of putting $7,500 to work is effectively $5,850.

The account then grows with no annual tax drag. Decades later, suppose Dev withdraws $20,000 in a retirement year. The entire withdrawal is taxed as ordinary income at whatever his rate is then. If he retired into a lower bracket than the 22% he deducted against, the deferral worked in his favor. Once he reaches RMD age, the IRS sets a minimum he must withdraw each year whether he needs the money or not.

Pros

• A deductible contribution cuts your tax bill in the year you make it, when your rate may be at its career peak.
• Tax-deferred compounding, with no annual tax on dividends, interest, or realized gains inside the account.
• Available to anyone with earned income, with spousal contributions allowed for a non-working spouse.
• Opens the door to later planning moves such as Roth conversions in low-income years.

Cons

• Deductibility phases out at moderate incomes if you're covered by a workplace plan.
• All deductible money and growth is taxed as ordinary income on withdrawal, with no access to lower capital-gains rates.
• Early withdrawals before 59 1/2 generally trigger a 10% penalty on top of tax.
• Required minimum distributions force taxable withdrawals starting at 73 (75 for those born in 1960 or later).