What Is a Traditional IRA?

A traditional individual retirement account (IRA) is a retirement savings vehicle offering tax-deferred growth. A traditional IRA is funded with pre-tax money (your contribution may be tax-deductible), unlike a Roth IRA, which is funded with after-tax dollars. A traditional IRA can be a beneficial investment tool, especially if you anticipate being in a lower tax bracket in retirement.

Here, we’ll explore how a traditional IRA works, as well as the benefits and potential drawbacks, to help you determine if contributing to one might make sense for you.

How a traditional IRA works

A traditional IRA is a retirement savings account you can open on your own, independent of an employer. You get to decide where to open the account and how to invest the money. Common investment options include mutual funds, stocks, exchange-traded funds (ETFs) and bonds.

The contribution limit for a traditional IRA is lower than some employer-sponsored retirement plans, like a 401(k), 403(b), and 457(b). In 2024 and 2025, the contribution limit is $7,000 for individuals under age 50, with an additional $1,000 catch-up contribution for individuals aged 50 and over. Your contributions to a traditional IRA may be tax-deductible depending on your adjusted gross income (AGI) and whether you (or your spouse, if applicable) are covered by a retirement plan at work.

The money you invest in a traditional IRA grows tax-deferred until you withdraw it in retirement. Qualifying withdrawals after age 59 ½ are taxed as regular income. Traditional IRAs are also subject to required minimum distributions (RMDs), which are government-mandated rules on how much you must take out of the account each year once you turn 73. The RMD amount depends on how much money is in the account and your life expectancy as calculated using the IRS’s “Uniform Lifetime Table.”

Who can open a traditional IRA?

To contribute to a traditional IRA, you (or you and your spouse, if you file jointly) must have taxable income. There is no age limit to open a traditional IRA if you have taxable compensation in the tax year you wish to contribute to the account. 

Benefits and drawbacks of a traditional IRA

There are several benefits and potential drawbacks of a traditional IRA that are important to understand before you open an account.

Benefits

Benefits of a traditional IRA can include:

• Tax-deferred growth of investments
• May be able to take early distributions (penalty free) for a qualifying reason
• No income limits for contributions
• Tax-deductible contributions up to a certain income limit
• Can contribute even if covered by a retirement plan at work
• No need to transfer account ownership when changing jobs

Drawbacks

Some potential drawbacks of a traditional IRA may include:

• Lower contribution limits than some employer-sponsored retirement plans
• Must take required minimum distributions starting at age 73
• Withdrawals of contributions and gains are reported as taxable income in retirement
• May face a 10% penalty for early withdrawals

Should you contribute to a traditional IRA?

Contributing to a traditional IRA may make sense for you depending on your finances and if you anticipate being in a lower tax bracket in retirement. Whether to open a traditional IRA depends on your long-term financial goals and retirement plans.

Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.