Traditional IRA: Complete Guide 2026 — Contribution Limits, Deductibility Rules, and Tax Strategy
The Traditional IRA remains one of the most powerful tax-deferred retirement accounts available to American workers. For 2025, the contribution limit is $7,000 ($8,000 if 50+), deductibility depends on income and workplace plan coverage, and distributions are taxed as ordinary income. This guide covers everything: contribution mechanics, deductibility phase-outs, Required Minimum Distributions starting at age 73 under SECURE 2.0, investment rules, and exactly when Traditional IRA outperforms Roth IRA.
Key Takeaways
- ▸2025 contribution limit: $7,000 per year ($8,000 age 50+), shared across all IRAs (Traditional + Roth combined).
- ▸Deductibility phases out for workplace plan participants at $79,000–$89,000 MAGI (single) and $126,000–$146,000 (MFJ, both covered).
- ▸Required Minimum Distributions (RMDs) begin at age 73 under SECURE 2.0 (signed 2022). Missing RMDs triggers a 25% penalty on the missed amount.
- ▸All pre-tax distributions taxed as ordinary income — no preferential capital gains rates inside an IRA.
- ▸10% early withdrawal penalty applies before age 59½, with 12 specific IRS exceptions including first home purchase ($10,000 lifetime limit) and higher education expenses.
- ▸No age limit on contributions (removed by SECURE Act 2019) — contributions allowed at any age with earned income.
- ▸Non-deductible contributions establish after-tax basis, enabling the backdoor Roth IRA conversion strategy.
- ▸Traditional IRA outperforms Roth when current marginal rate exceeds expected retirement marginal rate — most powerful for peak earners.
1. What Is a Traditional IRA?
A Traditional Individual Retirement Account (IRA) is a tax-advantaged savings account established under the Employee Retirement Income Security Act of 1974 (ERISA) and codified in Internal Revenue Code Section 408. It allows individuals with earned income to contribute pre-tax or after-tax dollars into an investment account, where assets grow tax-deferred until withdrawal in retirement.
The fundamental tax benefit is timing arbitrage: you contribute dollars before they are taxed (when eligible for deduction), let them compound without annual dividend, interest, or capital gains taxation for decades, and pay ordinary income tax only when you withdraw funds — ideally at a lower tax rate in retirement than during your working years.
As of year-end 2024, approximately 40.4 million U.S. households owned traditional IRAs with total assets of approximately $12.3 trillion, making it the largest single source of retirement savings in America. Source: Investment Company Institute, ICI Research Report "The IRA Investor Database" (2024).
Traditional IRA vs. Other Account Types
| Feature | Traditional IRA | Roth IRA | 401(k) Traditional |
|---|---|---|---|
| 2025 Contribution Limit | $7,000 | $7,000 | $23,500 |
| Tax on Contributions | Pre-tax (if deductible) | After-tax | Pre-tax |
| Tax on Withdrawals | Ordinary income | Tax-free (qualified) | Ordinary income |
| Income Limit to Contribute | None (deduct varies) | $165K single | None |
| RMDs at Age 73 | Yes | No (owner) | Yes (unless still working) |
| Employer Match | No | No | Yes (up to plan) |
2. 2025–2026 Contribution Limits
The IRA contribution limit is the same for both Traditional and Roth IRAs combined. You cannot contribute more than the annual limit across all your IRAs in aggregate.
| Year | Limit (Under 50) | Catch-Up (50+) | Total (50+) |
|---|---|---|---|
| 2019 | $6,000 | $1,000 | $7,000 |
| 2020 | $6,000 | $1,000 | $7,000 |
| 2021 | $6,000 | $1,000 | $7,000 |
| 2022 | $6,000 | $1,000 | $7,000 |
| 2023 | $6,500 | $1,000 | $7,500 |
| 2024 | $7,000 | $1,000 | $8,000 |
| 2025 | $7,000 | $1,000 | $8,000 |
| 2026 (projected) | $7,000 | $1,000 | $8,000 |
Source: IRS Revenue Procedure 2024-40 (2025 limits). 2026 projected based on CPI-W adjustments — confirm at IRS.gov after October 2025 announcement.
The Earned Income Requirement
Your IRA contribution cannot exceed your earned income for the year. Earned income includes wages, salaries, tips, self-employment income, and alimony received under pre-2019 divorce decrees. It does not include: Social Security benefits, pension income, investment dividends, capital gains, rental income, or interest. If your earned income is $3,000, your maximum IRA contribution is $3,000 — not $7,000.
3. Deductibility: Who Qualifies for the Tax Deduction?
The tax deduction for Traditional IRA contributions is not universal — it depends on whether you (or your spouse) participate in a workplace retirement plan, and if so, your MAGI.
2025 Deductibility Phase-Out Thresholds
| Filing Status | Workplace Plan? | Full Deduction | Phase-Out Range | No Deduction |
|---|---|---|---|---|
| Single / Head of Household | Yes | ≤ $79,000 | $79K–$89K | > $89,000 |
| Married Filing Jointly | Both covered | ≤ $126,000 | $126K–$146K | > $146,000 |
| Married Filing Jointly | Only spouse covered | ≤ $236,000 | $236K–$246K | > $246,000 |
| Married Filing Separately | Yes | $0 | $0–$10K | > $10,000 |
| Any filing status | No (neither) | Any income | N/A | N/A |
Source: IRS Publication 590-A, 2025 figures per IRS Rev. Proc. 2024-40.
What Counts as a "Workplace Plan"?
Traditional 401(k), Roth 401(k), 403(b), 457(b), SIMPLE IRA, SEP-IRA (as employer), and defined benefit pension plans all count. Being eligible for a plan — even if you choose not to contribute — counts as being "covered." Your W-2, Box 13 ("Retirement plan" checkbox) indicates coverage.
4. Who Can Contribute: Income and Eligibility Rules
Unlike Roth IRAs, there is no income limit on Traditional IRA contributions. Anyone with earned income can contribute — a single filer earning $1 million can contribute just as a filer earning $30,000. The income limits only affect whether the contribution is deductible.
The three eligibility requirements are:
- Earned income: You (or your spouse, for a Spousal IRA) must have compensation equal to or greater than the contribution amount for the tax year.
- Age: No maximum age limit (removed by SECURE Act 2019). No minimum age limit — minors with earned income can contribute.
- U.S. tax filer: You must be a U.S. person (citizen, resident alien, or U.S. territory resident) filing a U.S. federal income tax return.
5. How to Open and Fund a Traditional IRA
Opening a Traditional IRA takes less than 15 minutes at most major custodians. The application requires:
- Social Security Number or Individual Taxpayer Identification Number (ITIN)
- Government-issued photo ID
- Bank account for electronic funding (ACH)
- Beneficiary designation (primary and contingent)
Major custodians with no account minimums or maintenance fees for IRAs include Fidelity, Vanguard, Charles Schwab, and TD Ameritrade (now Schwab). Robo-advisors such as Betterment and Wealthfront also offer Traditional IRAs with automatic rebalancing. Self-directed IRA custodians (Equity Trust, Alto IRA, Kingdom Trust) are available for alternative investments but typically carry higher fees.
Funding: The contribution deadline is the federal income tax filing deadline of the following year (typically April 15). You may contribute a lump sum, set up automatic monthly contributions, or contribute at any point during the year. Dollar-cost averaging (monthly contributions) reduces sequence-of-returns risk in volatile markets but is not required.
6. What Can You Hold in a Traditional IRA?
Traditional IRAs have broad investment flexibility, especially compared to 401(k) plans limited to employer-selected fund lineups.
Permitted Investments
- ✓ Individual stocks (NYSE, Nasdaq, OTC)
- ✓ ETFs (equity, bond, commodity, REIT)
- ✓ Mutual funds (index, active, target-date)
- ✓ U.S. Treasury securities and I-Bonds (via TreasuryDirect IRA)
- ✓ Corporate and municipal bonds
- ✓ CDs (certificates of deposit) and money market funds
- ✓ REITs (real estate investment trusts)
- ✓ Options (covered calls, protective puts — custodian approval required)
- ✓ Some physical gold/silver coins (IRS-approved: American Eagle, Canadian Maple Leaf)
- ✓ Real estate (via Self-Directed IRA with specialized custodian)
Prohibited Investments
- ✗ Life insurance contracts
- ✗ Collectibles (art, antiques, rugs, wine)
- ✗ Non-IRS-approved coins and bullion
- ✗ S-corporation stock
- ✗ Transactions with disqualified persons (self, spouse, parents, children) — IRC §4975
- ✗ IRA as collateral for a personal loan
- ✗ Property you personally use (for SDIRA real estate)
Prohibited Transaction Warning
A prohibited transaction — such as borrowing from your IRA, using it as loan collateral, or transacting with a disqualified person — causes the entire IRA to be treated as distributed as of January 1 of the year the transaction occurred. All assets become ordinary income immediately, plus a 15% excise tax per year the transaction remains uncorrected. Source: IRC Section 4975.
7. How Tax Deferral Works — The Compound Effect
The mathematical power of a Traditional IRA is not just the upfront deduction — it is the elimination of annual drag from taxes on dividends, interest, and realized capital gains during the accumulation phase.
| Scenario | Starting Amount | Annual Return | After 30 Years | Difference |
|---|---|---|---|---|
| Taxable account (24% bracket on distributions) | $7,000/yr | 7% gross (5.3% after tax) | $502,000 | — |
| Traditional IRA (full tax deferral) | $7,000/yr | 7% gross (7% deferred) | $708,000 (pre-tax) | +$206,000 |
Illustrative projections only. Assumes consistent 7% annual return. Actual results vary. Source: calculations using standard compound interest formula.
The Traditional IRA account shown above has $708,000 pre-tax. At a 22% effective tax rate in retirement, the after-tax value is approximately $552,000 — still $50,000 more than the taxable account, without even accounting for the upfront deduction benefit. If the effective retirement rate drops to 15%, the Traditional IRA delivers roughly $601,000 after tax.
8. Early Withdrawal Penalties and Exceptions
Distributions before age 59½ from a Traditional IRA are subject to ordinary income tax plus a 10% early withdrawal penalty (IRC Section 72(t)). However, there are 12 specific statutory exceptions to the 10% penalty:
| Exception | Conditions / Limits |
|---|---|
| Death | Distributions after owner's death — beneficiary always qualifies. |
| Permanent disability | IRS definition: unable to engage in substantial gainful activity. |
| Substantially equal periodic payments (SEPP) | Rule 72(t): fixed annuity-like payments for 5 years or until 59½, whichever is longer. |
| Unreimbursed medical expenses | Expenses exceeding 7.5% of AGI in the same year. |
| Health insurance premiums | Only if unemployed and receiving unemployment compensation for 12+ consecutive weeks. |
| Higher education expenses | Tuition, fees, books, room and board for yourself, spouse, child, or grandchild at eligible institutions. |
| First home purchase | Lifetime limit: $10,000. Must be first-time buyer (no ownership in prior 2 years). |
| IRS levy | Distribution due to IRS levy on the IRA. |
| Qualified reservist distributions | Military reservists called to active duty for 180+ days. |
| Natural disaster distributions | SECURE 2.0 created $22,000 limit for federally declared disaster distributions. |
| Terminal illness | SECURE 2.0 added: distributions for terminally ill individuals (certified by physician). |
| Emergency personal expense | SECURE 2.0 added: one distribution per year of up to $1,000 for emergencies. |
Source: IRC §72(t)(2); SECURE 2.0 Act (P.L. 117-328) §§311, 314, 331.
9. Required Minimum Distributions (RMDs) Under SECURE 2.0
Required Minimum Distributions are IRS-mandated annual withdrawals from Traditional IRAs designed to ensure tax-deferred funds are eventually taxed. The SECURE 2.0 Act of 2022 (Division T of P.L. 117-328) increased the RMD age from 72 to 73 effective January 1, 2023, with a further increase to 75 scheduled for individuals born on or after January 1, 1960.
RMD Age Schedule Under SECURE 2.0
| Birth Year | RMD Start Age | First RMD Deadline |
|---|---|---|
| 1950 or earlier | 70½ or 72 (pre-SECURE) | Already started |
| 1951–1959 | 73 | April 1 of the year after turning 73 |
| 1960 or later | 75 | April 1 of the year after turning 75 |
Calculating Your RMD
RMD = IRA Balance (December 31 prior year) ÷ Uniform Lifetime Table Factor
Example: $500,000 balance ÷ 26.5 (age-73 factor) = $18,868 RMD
The IRS Uniform Lifetime Table (Table III in IRS Publication 590-B) provides life expectancy factors by age. At age 73, the factor is 26.5; at 80, it is 20.2; at 90, it is 11.4. The factor decreases each year, requiring larger percentage withdrawals as you age. IRS updated the Uniform Lifetime Table effective 2022, reflecting increased life expectancies — resulting in slightly smaller RMDs than the prior table.
If your sole IRA beneficiary is a spouse more than 10 years younger, you may use the Joint Life and Last Survivor Table (Table II), which produces lower factors and smaller required RMDs.
RMD Penalty for 2023 and Beyond
SECURE 2.0 reduced the excise tax for missed RMDs from 50% to 25% of the shortfall. It is further reduced to 10% if corrected within a 2-year Correction Window. Despite the reduction, this remains one of the most expensive penalties in the tax code — a $25,000 missed RMD could cost $6,250 in excise tax, before income tax on the eventual distribution. Source: SECURE 2.0 Act §302; IRS Form 5329.
10. Rollovers: 401(k)-to-IRA and IRA-to-IRA
Rolling funds from an employer plan into a Traditional IRA — a "rollover IRA" — is the most common use of Traditional IRAs and the primary reason IRA assets have grown so significantly.
Types of Rollovers
Direct Rollover (Preferred)
The employer plan sends the funds directly to the IRA custodian. No taxes are withheld, no 60-day clock starts, and there is no limit on direct rollovers. This is the simplest and safest method for any plan-to-IRA rollover.
60-Day Indirect Rollover
The distribution is paid to you personally; you must deposit it into an IRA within 60 days. The plan withholds 20% for taxes — you must deposit the full pre-withholding amount to avoid the withheld 20% being treated as a taxable distribution. You are limited to one indirect rollover per 12-month period across all IRAs (the "once-per-year rule," established in Bobrow v. Commissioner, 2014). Violation of this rule is a taxable distribution.
IRA-to-IRA Transfer
Moving funds directly between IRA custodians (a trustee-to-trustee transfer). Not subject to the once-per-year rollover rule — these are classified as transfers, not rollovers, and are unlimited in frequency. Standard when moving an IRA from one brokerage to another.
11. Inherited Traditional IRA Rules (SECURE Act)
The SECURE Act of 2019 fundamentally changed inherited IRA rules for deaths after December 31, 2019, replacing the old "stretch IRA" strategy with a 10-year window for most beneficiaries.
| Beneficiary Type | Rule | Annual RMDs During 10 Years? |
|---|---|---|
| Surviving spouse | May treat as own IRA (roll over) or keep as inherited — spouse rules apply | No 10-year rule; standard RMD rules |
| Minor child of deceased | 10-year rule begins when child reaches majority (~21–26 depending on state) | Annual RMDs until majority, then 10-year clock |
| Disabled/chronically ill beneficiary | Can stretch over own life expectancy | Annual RMDs (stretch allowed) |
| Beneficiary ≤ 10 years younger | Can stretch over own life expectancy | Annual RMDs (stretch allowed) |
| All other beneficiaries (non-EDB) | 10-year rule: account must be empty by Dec 31 of 10th year | Annual RMDs required if owner had started RMDs (proposed regs) |
Source: SECURE Act of 2019 (P.L. 116-94); IRS Proposed Regulations REG-105954-20 (2022, 2024).
12. Traditional IRA vs. Roth IRA: The Decision Framework
The correct choice depends on one fundamental question: is your marginal tax rate higher today or will it be higher at withdrawal? All other factors — RMDs, flexibility, heirs — are secondary.
Choose Traditional IRA When:
- ✓ Current marginal rate (e.g., 32%) exceeds expected retirement rate (e.g., 22%)
- ✓ You are in your peak earning years (40s–50s) at highest lifetime income
- ✓ You expect to retire in a lower-tax state
- ✓ You anticipate significant deductions in retirement (mortgage interest, charitable)
- ✓ You need the current deduction to fund the contribution itself
- ✓ Your employer plan offers a strong match (Traditional 401k before IRA)
Choose Roth IRA When:
- ✓ Current rate (e.g., 12%) is lower than expected retirement rate
- ✓ Early career, lower income years
- ✓ You value no RMDs for estate planning flexibility
- ✓ You expect significant Social Security or pension income
- ✓ Tax rates are likely to rise (sunset of TCJA after 2025)
- ✓ You want to leave tax-free assets to heirs
The Tax Diversification Approach
Many financial planners recommend contributing to both Traditional and Roth accounts simultaneously — a tax diversification strategy. Having assets in both pre-tax (Traditional) and post-tax (Roth) buckets gives flexibility to optimize taxable income in retirement by drawing from whichever type keeps your tax rate lower in any given year. This is especially valuable when tax laws are uncertain, as they are heading into the TCJA sunset in 2026.
13. Non-Deductible Contributions and the Backdoor Roth
High earners who exceed the deductibility threshold can still contribute to a Traditional IRA as a non-deductible contribution. While there is no upfront tax deduction, the assets still grow tax-deferred — and non-deductible contributions establish after-tax basis, which enables the backdoor Roth IRA strategy.
Track all non-deductible contributions using IRS Form 8606. Each year's Form 8606 carries forward the cumulative basis amount. Without Form 8606 records, the IRS has no way to distinguish your after-tax basis from pre-tax funds — resulting in double taxation at withdrawal. Store all Forms 8606 with your permanent tax records, not just the current year's return.
14. Spousal IRA: Contributing for a Non-Working Spouse
A Spousal IRA allows a working spouse to contribute to a Traditional IRA on behalf of a non-working or lower-earning spouse. This doubles the household IRA contribution to $14,000 per year ($16,000 if both are 50+) — a significant benefit for single-income households.
Requirements: You must be married and filing jointly. The working spouse's earned income must be at least equal to the combined contributions for both spouses. The IRA belongs to the non-working spouse — it is their account, titled in their name and using their Social Security number.
Deductibility for spousal IRA contributions follows the same workplace plan rules as regular contributions. If neither spouse has a workplace plan, both contributions are fully deductible. If the working spouse has a plan, both IRA deductions phase out at the covered-employee thresholds. Source: IRS Publication 590-A, "Spousal IRA" section.
15. Common Mistakes to Avoid
✗ Contributing more than the earned income limit
Fix: The IRA contribution cannot exceed your earned income for the year. Excess contributions face a 6% excise tax per year until corrected.
✗ Not filing Form 8606 for non-deductible contributions
Fix: Every year with a non-deductible contribution requires Form 8606. Missing years mean lost basis and future double taxation.
✗ Missing the April 15 contribution deadline
Fix: Contributions for the prior tax year must be made by the filing deadline. Extensions do not extend this deadline.
✗ Not updating beneficiary designations after life events
Fix: IRA beneficiary designations override wills. Update after divorce, remarriage, and births. An ex-spouse will inherit the IRA if still named as beneficiary.
✗ Forgetting RMDs or missing the April 1 first-year deadline
Fix: Taking two RMDs in the first year (if delaying to April 1) means two distributions taxed in one year — often better to take the first RMD in the year you turn 73.
✗ Rolling a 401(k) into an IRA without considering the pro-rata rule impact on backdoor Roth
Fix: Pre-tax 401(k) rollover to Traditional IRA creates pre-tax IRA balance that complicates future backdoor Roth conversions. Model the impact before rolling over.
✗ Investing conservatively inside the IRA while holding equities in taxable accounts
Fix: Tax-inefficient assets (bonds, REITs, dividend stocks) belong in tax-deferred accounts. Tax-efficient assets (index ETFs, growth stocks) belong in taxable accounts where gains tax at lower capital gains rates.
16. Glossary
- Traditional IRA
- Individual Retirement Account allowing tax-deductible contributions (if eligible) and tax-deferred growth, with distributions taxed as ordinary income.
- Deductible Contribution
- IRA contribution that reduces your taxable income in the contribution year — available if you meet income and workplace plan eligibility criteria.
- Non-Deductible Contribution
- IRA contribution made with after-tax dollars when the deduction is unavailable due to income limits, establishing after-tax basis tracked on Form 8606.
- Required Minimum Distribution (RMD)
- IRS-mandated annual withdrawal from Traditional IRA beginning at age 73 (SECURE 2.0), calculated by dividing prior-year balance by Uniform Lifetime Table factor.
- Form 8606
- IRS form tracking after-tax IRA basis — required for non-deductible contributions, Roth conversions, and certain distributions.
- Rollover IRA
- Traditional IRA funded primarily by assets transferred from an employer retirement plan (401(k), 403(b), etc.).
- Spousal IRA
- IRA funded by a working spouse on behalf of a non-working spouse, enabling retirement savings contributions for single-income households.
- Rule 72(t)
- IRS provision allowing penalty-free early IRA distributions via Substantially Equal Periodic Payments (SEPP) — calculated by IRS-approved methods and must continue for 5 years or age 59½.
- Once-Per-Year Rollover Rule
- Limitation allowing only one indirect (60-day) IRA-to-IRA rollover per 12-month period across all IRA accounts — established in Bobrow v. Commissioner (2014).
- SECURE 2.0 Act
- Setting Every Community Up for Retirement Enhancement 2.0, signed December 29, 2022 — increased RMD age to 73 (75 for those born in 1960+), reduced RMD penalty to 25%, added new exceptions to early withdrawal penalties.
17. Frequently Asked Questions
What is the Traditional IRA contribution limit for 2025?
For 2025, the Traditional IRA contribution limit is $7,000 per year for individuals under age 50. Workers age 50 and older can contribute an additional $1,000 catch-up contribution, for a total of $8,000. This limit is shared across all IRAs — if you have both a Traditional and a Roth IRA, the combined contributions to both accounts cannot exceed $7,000 ($8,000 if 50+). The limit was last increased in 2024 from $6,500 to $7,000 and is indexed for inflation in $500 increments. You must have earned income (wages, self-employment income, alimony received) at least equal to the amount contributed. Source: IRS Rev. Proc. 2024-40.
Who can deduct Traditional IRA contributions in 2025?
Whether you can deduct Traditional IRA contributions depends on whether you (or your spouse) are covered by a workplace retirement plan. If neither you nor your spouse has a workplace plan, contributions are fully deductible regardless of income. If covered by a workplace plan: single filers can fully deduct contributions up to $79,000 MAGI (phase-out begins), with no deduction above $89,000. Married filing jointly (both covered): full deduction up to $126,000, phase-out to $146,000. Married filing jointly (only spouse has workplace plan): phase-out $236,000–$246,000 for the non-covered spouse. If your income exceeds these thresholds, you can still contribute (as a non-deductible contribution) — it just won't be tax-deductible. Source: IRS Publication 590-A.
When do Required Minimum Distributions (RMDs) begin for a Traditional IRA?
Under the SECURE 2.0 Act (signed December 29, 2022), Required Minimum Distributions from Traditional IRAs must begin by April 1 of the year following the year you turn 73, for individuals who turn 72 after December 31, 2022. Before SECURE 2.0, the age was 72 (and 70½ before the original SECURE Act of 2019). The RMD amount is calculated by dividing your December 31 prior-year IRA balance by the IRS Uniform Lifetime Table life expectancy factor for your age (IRS Publication 590-B). Failing to take the RMD results in an excise tax: 25% of the missed RMD amount (reduced to 10% if corrected within 2 years). Source: IRS Publication 590-B; SECURE 2.0 Act §107.
Can I contribute to a Traditional IRA if I have a 401(k)?
Yes. Having a 401(k) or other workplace retirement plan does not prevent you from contributing to a Traditional IRA — but it does affect whether the contribution is tax-deductible. If your MAGI exceeds the phase-out threshold for your filing status ($79,000–$89,000 for single filers in 2025 if covered by a workplace plan), you can still make a non-deductible contribution. Non-deductible contributions build after-tax basis in the IRA — trackable on IRS Form 8606 — and can later be converted to a Roth IRA (backdoor Roth strategy).
What happens to a Traditional IRA when the owner dies?
Under the SECURE Act of 2019 and SECURE 2.0, most non-spouse beneficiaries who inherit a Traditional IRA after December 31, 2019 must empty the account within 10 years of the original owner's death (the '10-year rule'). Exceptions exist for Eligible Designated Beneficiaries (EDBs): surviving spouses, minor children (until majority), disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased. Surviving spouses can roll the inherited IRA into their own IRA, delaying RMDs. All inherited IRA distributions are ordinary income to the beneficiary. The IRS issued Proposed Regulations in 2022 and 2024 clarifying that non-EDB beneficiaries of owners who had already started RMDs must also take annual distributions within the 10-year window. Source: IRS Proposed Regulations §1.401(a)(9)-5.
What investments can I hold in a Traditional IRA?
Traditional IRAs can hold a wide range of investments: stocks, ETFs, mutual funds, bonds, CDs, money market funds, REITs, and Treasury securities. Prohibited investments include: life insurance contracts, collectibles (art, antiques, coins — with limited exceptions for certain U.S. government minted coins), S-corporation stock, and most alternative investments that violate IRS prohibited transaction rules. Self-directed IRAs (SDIRAs) held by specialized custodians can expand holdings to real estate, private equity, private debt, and cryptocurrency — but require careful compliance to avoid the IRS recapturing the entire IRA as income for prohibited transactions. Source: IRC Section 408(a)(3), IRS Publication 590-A.
Can I contribute to a Traditional IRA at any age?
Yes. The SECURE Act of 2019 eliminated the prior age cap of 70½ for Traditional IRA contributions. As of 2020, there is no maximum age for contributing to a Traditional IRA — as long as you have earned income for the year, you can contribute at any age, including after 73 when RMDs have begun. However, contributing while simultaneously required to take RMDs has limited tax benefit — the RMD is taxable income regardless of contributions. The net effect is that contributions reduce your overall IRA balance going into the next year's RMD calculation.
What is the Traditional IRA contribution deadline?
You can make Traditional IRA contributions for a given tax year up until the federal income tax filing deadline of the following year, typically April 15. Extensions do not extend the IRA contribution deadline. For example, contributions for the 2025 tax year must be made by April 15, 2026 (or the 2026 filing deadline if shifted by a holiday). You must designate the contribution year when making the deposit — custodians typically ask you to specify 'prior year contribution' for contributions made between January 1 and April 15.
How are Traditional IRA distributions taxed?
All distributions from a Traditional IRA funded with deductible (pre-tax) contributions are taxed as ordinary income at your marginal federal income tax rate in the year of withdrawal. They are NOT taxed as long-term capital gains, regardless of how long the investments were held inside the IRA. If you made non-deductible contributions and tracked the basis on Form 8606, a pro-rata portion of each distribution is tax-free (basis recovery). Distributions before age 59½ are generally subject to an additional 10% early withdrawal penalty, with specific exceptions: first-time home purchase (up to $10,000), higher education expenses, substantially equal periodic payments (Rule 72(t)), disability, death, medical expenses exceeding 7.5% of AGI, and others (IRC Section 72(t)(2)).
Is a Traditional IRA or Roth IRA better?
Traditional IRA is generally better when: your current marginal tax rate is higher than your expected rate in retirement (common for peak earners); you want the tax deduction now to fund the retirement account itself; or you live in a high-income-tax state now and expect to retire in a lower-tax state. Roth IRA is generally better when: you are early in your career in low tax brackets; you expect higher tax rates in retirement; you want to avoid RMDs; or you want to leave tax-free assets to heirs. The mathematical breakeven is where present-value taxes paid (Traditional now) equals future taxes paid (Roth at withdrawal). For most middle-income earners who expect stable bracket progression, diversifying between both types — tax diversification — is optimal. Source: Vanguard Research 'Roth or Traditional? Making the Right IRA Choice' (2024).
Authoritative Sources
- IRS Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs) ↗
- IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs) ↗
- IRS: IRA FAQs ↗
- IRS: Required Minimum Distributions (RMDs) ↗
- Congress.gov: SECURE 2.0 Act of 2022 (P.L. 117-328) ↗
- Investment Company Institute: IRA Assets and Ownership (2024) ↗