Traditional IRA

A Traditional IRA (Individual Retirement Account) is a personal savings account that lets you set aside money for retirement while receiving potential tax benefits today. Contributions may be tax-deductible, meaning you could lower your taxable income in the year you contribute. Your money then grows tax-deferred, so you do not pay taxes on earnings until you withdraw funds in retirement.

For 2026, the contribution limit is $7,000 per year. If you are age 50 or older, you can add an extra $1,000 as a catch-up contribution, bringing your total to $8,000. These limits apply across all your IRA accounts combined, not per account.

Whether your contribution is tax-deductible depends on two factors:

• Your income level
• Whether you or your spouse have access to a workplace retirement plan, such as a 401(k)

If neither you nor your spouse is covered by a workplace plan, your contribution is generally fully deductible regardless of income. If you are covered by a workplace plan, the deduction phases out at certain income levels.

When you reach age 73, the IRS requires you to start taking money out each year. These are called Required Minimum Distributions, or RMDs. Withdrawals are taxed as ordinary income. If you take money out before age 59 and a half, you may owe a 10 percent early withdrawal penalty on top of regular income taxes, with some exceptions.

Practical example: Suppose you earn $55,000 this year and contribute $7,000 to a Traditional IRA. If that contribution is fully deductible, your taxable income drops to $48,000. The money grows tax-deferred until retirement, when you pay income tax on withdrawals at whatever rate applies at that time.

A Traditional IRA works well for people who expect to be in a lower tax bracket in retirement than they are today, making the upfront deduction especially valuable. It is one of the most widely used retirement savings tools available to individuals with earned income.

RetireGrader is not a financial advisor or fiduciary. This content is for educational purposes only.