Traditional IRA's Explained 📈
Traditional IRA Explained
How It Works
With a Traditional IRA, you’re able to make contributions with pre-tax dollars, reducing your taxable income for that year by the amount you contribute.
The Traditional IRA has an annual contribution limit:
$7,000 if you are under age 50
$8,000 if you are over age 50
Unlike the Roth IRA, funds from a Traditional IRA will be taxed upon withdrawal, based on your ordinary income tax rate at the time of withdrawal.
Like the Roth IRA, you're qualified to withdraw from a Traditional IRA when: ✅ You are over the age of 59 ½ ✅ You have had the account open for at least five years
Required Minimum Distributions (RMDs) 🏦
It’s important to note that for Traditional IRAs, Required Minimum Distributions (RMDs) begin when you turn 73.
📌 What are RMDs? These are minimum amounts that IRA owners must withdraw annually from their accounts after reaching the set age.
🚨 Penalty Alert: If you miss an RMD, you could face up to a 25% penalty on the amount you should have withdrawn.
📅 RMD Deadlines:
The first RMD is due by April 1 of the year after you turn 73
All following withdrawals are due by December 31 each year
📊 How to Calculate Your RMD: Take the IRA balance at the end of the previous year and divide by your Life Expectancy Factor.
Income Limits & Tax Deductibility
A Traditional IRA typically has no income limit that affects your pre-tax contributions—unless you (or your spouse) have a workplace retirement plan like a 401[k].
📌 If you or your spouse have a 401[k], the amount you can deduct from your taxable income depends on:
Your income
Your filing status
Even if your income exceeds the deduction limits, you can still contribute up to the annual maximum allowed for a Traditional IRA. However, part or all of your contribution may not be tax-deductible.
📊 Tax-Deductible Contribution Limits (2025)
Filing Status
Covered by Workplace Retirement Plan?
Full Deduction Allowed If Income
Partial Deduction Allowed If Income
No Deduction Allowed If Income
Single
Yes
Less than $77,000
Between $77,000 - $87,000
Greater than $87,000
Married Filing Jointly
Yes (You)
Less than $123,000
Between $123,000 - $143,000
Greater than $143,000
Married Filing Jointly
Yes (Spouse, but You Are Not)
Less than $193,000
Between $193,000 - $203,000
Greater than $203,000
Married Filing Jointly
No
No Limit
Married Filing Separately
Yes
Not Eligible
Between $0 - $10,000
Greater than $10,000
🚀 Workplace Retirement Plans & Traditional IRAs
As you can see, having a workplace retirement plan, most commonly a 401[k], can limit the benefits of a Traditional IRA, including: ✅ The amount you can contribute as tax-deductible
💡 However, always prioritize taking full advantage of your 401[k] employer match—since it’s essentially free money!
Depending on your income situation, it may also be worth reviewing options such as:
Opening a Roth IRA
Using the Backdoor Roth IRA Strategy
✅ Key Benefits of a Traditional IRA
Tax-Free Growth – Your investments grow tax-deferred.
Tax-Deductible Contributions – Contribute to the IRA using pre-tax income.
No Income Limits – Tax-deductible contributions generally won’t be affected by income.
🚨 Early Withdrawal Rules & Penalties
⛔ Penalty: A 10% federal penalty applies to withdrawals made before age 59½
📌 Exceptions (Penalty-Free, But Still Taxed): ✅ Qualified education expenses – Tuition, books, etc. ✅ Disability or death ✅ Medical expenses exceeding 7.5% of AGI (Adjusted Gross Income) ✅ Health insurance premiums if unemployed
💡 Remember: Income tax is still owed on the amount withdrawn, as Traditional IRA contributions are made with pre-tax dollars.
Final Thoughts 💭
Contributing to a Traditional IRA provides unique benefits, primarily focused on tax-deferred growth and pre-tax contributions.
💡 Anyone planning for retirement should consider opening a Traditional IRA account.
📖 Stick around—we’ll include a step-by-step guide to creating your own Traditional IRA account!
Last updated