Understanding Your Traditional IRA

Important Note

This information is for educational purposes only. Our firm does not provide legal, tax, or accounting advice. This guide should not be considered legal, tax, or accounting advice. Please consult with qualified professionals about your specific situation before making retirement planning decisions.

What Is a Traditional IRA?

A Traditional IRA (Individual Retirement Account) is a personal retirement savings account that offers tax advantages to help you save for retirement. Created by Congress in 1974, IRAs give individuals a way to save for retirement independently of their employer.

Unlike a 401(k) that requires an employer sponsor, you can open an IRA on your own at most banks, brokerage firms, or mutual fund companies. It’s your personal retirement account that stays with you regardless of where you work.

How Traditional IRAs Work

A Traditional IRA works similarly to a Traditional 401(k), but with more flexibility and control:

  1. You contribute money to your IRA (up to annual limits)
  2. You may get a tax deduction for your contribution
  3. Your money grows tax-deferred inside the account
  4. You pay income tax when you withdraw money in retirement

The main advantage is that you’re in complete control—you choose where to open the account, what to invest in, and how to manage it.

Tax Benefits

Tax Deduction Rules for 2026

Whether you can deduct your Traditional IRA contribution depends on two factors:

If you DON’T have a workplace retirement plan: You can deduct your full IRA contribution regardless of income.

If you DO have a workplace retirement plan: Your deduction phases out at higher incomes. For 2025, the limits have increased:

If your spouse has a workplace plan but you don’t: Higher income limits apply for 2026:

Tax-Deferred Growth

Like a 401(k), your investments grow tax-free while in the IRA. You don’t pay taxes on gains, dividends, or interest until you withdraw the money. This tax deferral helps your savings compound more efficiently over time.

Taxes on Withdrawals

When you take money out in retirement, you pay ordinary income tax on:

If you made non-deductible contributions (because your income was too high), you don’t pay tax on that portion again when withdrawn.

Contribution Limits for 2026

The IRA contribution limits have increased for 2026:

These limits are much lower than 401(k) limits, but remember—an IRA is meant to supplement, not replace, workplace retirement savings.

Important rules:

Who Can Contribute?

Almost anyone with earned income can contribute to a Traditional IRA:

There’s no maximum income limit for contributing to a Traditional IRA, though high earners may not get a tax deduction.

Investment Options

One of the biggest advantages of an IRA is investment flexibility. Unlike most 401(k)s with limited menus, IRAs offer virtually unlimited investment choices:

This flexibility allows you to build a diversified portfolio using low-cost index funds that provide exposure to global markets, combined with conservative investments based on your risk tolerance.

Getting Your Money Out

Early Withdrawals (Before Age 59½)

Taking money out before age 59½ usually triggers:

However, there are exceptions to the penalty (though you still pay income tax):

After Age 59½

Once you reach 59½, you can withdraw money without penalties. You’ll pay income tax, but you have complete flexibility in how much and when to withdraw.

Required Minimum Distributions (Updated Rules)

Starting age: You must begin taking Required Minimum Distributions (RMDs) at age 73 (increased from 72 in 2020, and will increase to 75 starting in 2033).

Calculation: The amount is based on your account balance and life expectancy using IRS tables.

Penalties for missing RMDs: Significantly reduced penalties under SECURE 2.0:

First RMD timing: You have until April 1 of the year after you turn 73 to take your first RMD, though this means taking two RMDs in one year.

Traditional IRA vs. Employer Plans

Advantages of IRAs

Advantages of 401(k)s

Many people use both—maximizing employer match in their 401(k), then contributing to an IRA for additional savings and flexibility.

Traditional IRA vs. Roth IRA

The main difference is when you pay taxes:

Traditional IRA

Roth IRA

You can have both types, but your total combined contribution can’t exceed the annual limit ($7,500 total, or $8,600 if 50+).

Rollovers into Traditional IRAs

Traditional IRAs commonly receive rollovers from employer plans when you:

Benefits of rolling to an IRA

The rollover process

  1. Open a Traditional IRA
  2. Request a direct rollover from your 401(k)
  3. Choose your investments
  4. Continue tax-deferred growth

Important: Direct rollovers avoid taxes and penalties. If you receive the check personally, you have 60 days to deposit it in an IRA or face taxes and penalties.

Special Situations

Spousal IRA

A non-working spouse can contribute to an IRA based on the working spouse’s income. This allows couples to double their IRA savings even with one income—each spouse can contribute up to $7,500 ($8,600 if 50+) for a total of $15,000-$17,200 annually.

SEP and SIMPLE IRAs

Self-employed individuals and small business owners have additional options:

Backdoor Roth Strategy

High earners who can’t contribute directly to a Roth IRA can:

  1. Make a non-deductible Traditional IRA contribution
  2. Convert it to a Roth IRA
  3. Pay taxes only on any earnings (if converted quickly, this is minimal)

This strategy works best when you have no other Traditional IRA balances due to the “pro-rata rule.”

Inherited IRAs

Recent changes affect inherited IRAs:

Common Mistakes to Avoid

  1. Missing the contribution deadline – You have until tax filing deadline, not December 31
  2. Over-contributing – Excess contributions face a 6% annual penalty
  3. Taking early withdrawals – Loses tax benefits and growth potential
  4. Forgetting RMDs – Still expensive penalties despite reductions
  5. Not tracking non-deductible contributions – Could pay tax twice on the same money
  6. Not naming beneficiaries – Causes problems for heirs
  7. Paying unnecessary fees – High fees erode returns over time
  8. Not coordinating with 401(k) strategy – Missing opportunities for tax diversification

Who Should Consider a Traditional IRA?

Traditional IRAs work well for:

Opening and Managing an IRA

Where to Open

You can open an IRA at:

What to Look For

Investment Approach

A simple, effective strategy:

  1. Choose low-cost index funds
  2. Diversify across global markets
  3. Include bonds based on your age and risk tolerance
  4. Consider target-date funds for simplicity
  5. Rebalance annually
  6. Stay invested through market ups and downs

Making the Most of Your Traditional IRA

To maximize your Traditional IRA:

  1. Contribute early in the year – More time for tax-deferred growth
  2. Make it automatic – Set up monthly contributions
  3. Invest appropriately – Don’t leave money in cash or low-return savings
  4. Watch fees – Even small fees compound over time
  5. Maximize deductions – Contribute when you qualify for deductions
  6. Coordinate with other accounts – View your IRA as part of your total retirement picture
  7. Keep excellent records – Track contributions, especially non-deductible ones
  8. Review beneficiaries regularly – Update after major life events
  9. Plan for RMDs – Understand the timing and tax implications
  10. Consider Roth conversions – During low-income years

Recent Changes from SECURE 2.0

The SECURE 2.0 Act brought several important improvements:

RMD Changes

Other Improvements

Future Changes

Advanced Strategies

Tax-Loss Harvesting Coordination

If you have taxable investment accounts, coordinate them with your IRA:

Roth Conversion Ladders

During low-income years, consider converting Traditional IRA money to Roth:

Asset Location Strategy

Optimize which investments go where:

The Bottom Line

A Traditional IRA provides a valuable way to save for retirement with tax advantages, especially if you don’t have access to a workplace plan or want to save beyond your 401(k). Recent law changes have made IRAs more flexible with reduced penalties, higher income limits for deductibility, and elimination of age restrictions.

While contribution limits are lower than workplace plans, the complete control over investments and greater flexibility make IRAs an important part of retirement strategies. The key improvements—including reduced RMD penalties and increased income thresholds—make Traditional IRAs more attractive than ever.

Whether you’re self-employed, between jobs, or simply want to boost your retirement savings, a Traditional IRA offers tax benefits today and growth for tomorrow. Start contributing regularly, invest wisely for long-term growth, and take advantage of the recent improvements to maximize your retirement security.

Remember, IRAs work best as part of a comprehensive retirement strategy. Combined with workplace plans, Social Security, and other savings, they help build the financial security you need for a comfortable retirement.

This guide provides general educational information about Traditional IRAs as of 2026. Individual circumstances vary, and specific rules may change. Tax laws are subject to change. Consult with qualified professionals for advice about your personal situation.