Table of Contents
How does a traditional IRA work?
Traditional IRA withdrawals
Who can open a Traditional IRA? Traditional IRA income limits
Maximum traditional IRA contribution limits
Who can open a Traditional IRA? Traditional IRA income limits
Maximum traditional IRA contribution limits
Roth IRA vs. Traditional IRA
Traditional IRA vs 401(k)
When should you open a traditional IRA?
Traditional IRA pros and cons
The bottom line
Want to speak with someone?
Still unsure and want to speak with someone? Set up a time here.
Schedule a callWhat Is a Traditional IRA & How Does It Work?
Jun 21, 2022
·
6 min read
A traditional IRA, lets you contribute money towards retirement with pre-tax income. That means you don’t have to pay taxes on eligible contributions in the year you make them.
For many people, a traditional IRA can be an effective way to invest more money toward retirement while lowering their tax bill. However, this type of retirement account does come with limitations, including how much you’re allowed to contribute each year and when you can take withdrawals.
A traditional individual retirement account, or IRA, lets you contribute money towards retirement with pre-tax income. That means you don’t have to pay taxes on eligible contributions in the year you make them. So if you contribute, say, $1000 in 2021, you can reduce your taxable income by that same amount when you file your federal tax returns for that year. Experts consider this one of the primary traditional IRA benefits. Additionally, your invested funds aren’t subject to taxes until you take distributions from your account.
A traditional IRA is a type of account that you can open through a brokerage firm or robo-advisor. You may choose your own investment strategy based on your risk tolerance and timeline for retirement.
Since this type of account is designed to help you prepare for retirement, you must wait until you turn 59 ½ before you can begin taking distributions from your traditional IRA. If you withdraw funds before that age, you’ll have to pay a 10% penalty in addition to state and federal income taxes.
There are some exceptions if you use the early withdrawn funds for certain purposes, such as:
Traditional IRAs also come with required minimum distributions (RMD). Once you reach age 72, you are required to withdraw funds each year (and consequently, pay taxes on them). You may withdraw more than the RMD.
Retirement mistake finder
Take our retirement analyzer to find ways to better optimize your retirement investments.
Retirement AnalyzerUnlike a Roth IRA, there are no income limits for contributing to a traditional IRA. However, the size of your eligible income tax deduction may be impacted if you’re also covered by an employer-sponsored retirement plan.
The 2021 phase-out ranges are as follows for anyone with access to a workplace 401k plan:
The IRS announces new maximum contribution limits each year for traditional IRAs. Individuals who are 50 years or older may contribute more as a catch-up contribution, since they’re closer to retirement age.
Here are the 2021 traditional IRA contribution limits:
You may still contribute more money to your IRA than those limits, but you won’t receive any tax benefits.
Unlike a Roth IRA, there are no income limits for contributing to a traditional IRA. However, the size of your eligible income tax deduction may be impacted if you’re also covered by an employer-sponsored retirement plan.
The 2021 phase-out ranges are as follows for anyone with access to a workplace 401k plan:
The IRS announces new maximum contribution limits each year for traditional IRAs. Individuals who are 50 years or older may contribute more as a catch-up contribution, since they’re closer to retirement age.
Here are the 2021 traditional IRA contribution limits:
You may still contribute more money to your IRA than those limits, but you won’t receive any tax benefits.
In addition to a traditional IRA, a Roth IRA is another type of retirement savings account that comes with tax advantages. Like a traditional IRA, a Roth IRA comes with the same maximum contribution limits each year. You’ll also incur the same 10% penalty if you take ineligible withdrawals before you reach 59 ½ years old. But there are a few important differences between the two types of accounts:
Instead of deducting the amount you contribute from your taxable income with traditional IRAs, with a Roth IRA you withdraw your funds completely tax-free in retirement. In other words, if your investments grow over the years so that you accumulate more money than you contribute, you don’t have to pay federal income tax on any of those earnings.
While there are no income limits associated with a traditional IRA (unless you also have access to a workplace 401(k) plan), there are income limits you must meet in order to make the maximum contribution to a Roth IRA:
There are phaseout limits for Roth IRAs as well, allowing you to contribute a reduced amount if you are within those thresholds:
A traditional 401(k) is a retirement plan offered through an employer. (Note that there is a 401(k) option for self-employed people, known as a solo 401(k).)
A traditional IRA and a 401(k) share several common features.
Here are some of the key differences between a 401(k) compared to a traditional IRA:
Experts say a traditional IRA is best suited for individuals who either don’t have access to a 401(k) or other employer plan, or who do have access to a 401(k) but whose income is under the limits to still qualify for the IRA tax deduction. That gives you access to the tax deduction, as well as more flexibility in your investment choices.
A traditional IRA may lower your tax bill now while offering a long-term investment vehicle as part of your retirement strategy.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Disclosures
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
IRA Withdrawal for Education: What to Know
Using money from retirement is essentially borrowing from the future to pay for expenses now. An IRA withdrawal for education must abide by several rules.
Read More
Can an IRA Be Placed Into a Trust?
Passing an IRA on to beneficiaries after one’s death can be an involved process. Using a trust can be one way to control who and when will benefit from those funds.
Read More
What a Partial Rollover Is & How to Do One
Partial 401(k) rollovers can be an option for those who aren’t content with their 401(k) investment options or who need to bridge the retirement gap between ages 55 and 59.
Read More
What Is a Simplified Employee Pension (SEP) IRA?
A SEP IRA is a type of tax-advantaged retirement account that is available to self-employed people or small business owners and their employees.
Read More
It's time to focus on the future of your wealth.