Traditional IRA
A retirement account where contributions may be tax-deductible and withdrawals are taxed as ordinary income.
What is Traditional IRA?
A Traditional IRA is an individual retirement account where contributions may be fully or partially deductible from taxable income (subject to income limits if you have a workplace retirement plan). Earnings grow tax-deferred. Withdrawals in retirement are taxed as ordinary income. Required minimum distributions (RMDs) must begin at age 73. Early withdrawals before age 59½ typically incur a 10% penalty plus income tax. The Traditional IRA is most beneficial for those who expect to be in a lower tax bracket in retirement than during their working years — the opposite logic of the Roth IRA.
Example
A 50-year-old in the 32% federal tax bracket contributes $8,000 to a Traditional IRA. If fully deductible, the immediate tax savings is $2,560 (32% × $8,000). At retirement in the 22% bracket, withdrawals are taxed at a lower rate — making the Traditional IRA advantageous.
Source: IRS — Traditional IRAs