What Is a Traditional IRA and How Does It Work?

Traditional IRAs as Retirement Plans in 2025

Key Points

Traditional IRAs allow tax-deferred investments and potential deductions based on income and tax status.
Contributions can be made at any age with limits of $7,000, or $8,000 for those 50+, depending on income.
Withdrawals are penalty-free after age 59 1/2, and required distributions start at age 73.

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*Adjusted Gross Income
2024 Modified AGI*	2025 Modified AGI	Maximum Tax Deduction
$77,000 or less	$79,000 or less	$7,000, or $8,000 for those 50 and up
Between $77,000 and $87,000	Between $79,000 and $89,000	A reduced amount
More than $87,000	More than $89,000	None

For joint filers covered by a retirement plan at work:

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2024 Modified AGI	2025 Modified AGI	Maximum Tax Deduction
$123,000 or less	$126,000 or less	$7,000, or $8,000 for those 50 and up
Between $123,000 and $143,000	Between $126,000 and $146,000	A reduced amount
More than $143,000	More than $146,000	None

For single filers NOT covered by a retirement plan at work:

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2024 Modified AGI	2025 Modified AGI	Maximum Tax Deduction
Any	Any	$7,000, or $8,000 for ages 50 and up

For joint filers NOT covered by a retirement plan at work, and spouse IS NOT:

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2024 Modified AGI	2025 Modified AGI	Maximum Tax Deduction
Any	Any	$7,000, or $8,000 for those 50 and up

For joint filers NOT covered by a retirement plan at work, but spouse IS:

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2024 Modified AGI	2025 Modified AGI	Maximum Tax Deduction
$230,000 or less	$236,000 or less	$7,000, or $8,000 for those 50 and up
Between $230,000 and $240,000	Between $236,000 and $246,000	A reduced amount
More than $240,000	More than $246,000	None

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What are the beneficiary distribution options?

When a traditional IRA owner dies, there are many different scenarios that may take place -- depending on who is listed as the beneficiary. Keep in mind that a traditional IRA is usually made up of pre-tax contributions, so within a traditional IRA is an embedded tax liability that ultimately needs to be paid, even if over time.

If the original account holder is your spouse, you will have the option to merge the money with your own traditional IRA and realize no tax consequence. Alternatively, when a traditional IRA becomes the property of a non-spouse beneficiary, it is now considered an inherited IRA and typically must be distributed within 10 years for accounts inherited after Jan. 1, 2020, under the SECURE Act of 2019 rules.

What are the pros and cons of a traditional IRA?

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Pros of a traditional IRA	Cons of a traditional IRA
· Potential tax deduction now · No age limit for contribution · Tax-deferred growth · Extra retirement savings vehicle (regardless of retirement plan coverage through employer) · Could create tax diversification if you already have significant Roth assets · Wide array of investment options · Can easily be rolled over to accounts with similar tax treatment	· Potential higher tax rate in retirement · Limited tax benefits, even if you are eligible for the full deduction · Limits backdoor Roth IRA potential · RMDs increase taxable income in retirement · Not the most efficient to receive as a beneficiary due to embedded tax liability · Recent elimination of stretch IRA (account must be liquidated by beneficiary within 10 years) · Complicated rules

Pros of a traditional IRA

Cons of a traditional IRA

· Potential tax deduction now · No age limit for contribution · Tax-deferred growth · Extra retirement savings vehicle (regardless of retirement plan coverage through employer) · Could create tax diversification if you already have significant Roth assets · Wide array of investment options · Can easily be rolled over to accounts with similar tax treatment

· Potential higher tax rate in retirement · Limited tax benefits, even if you are eligible for the full deduction · Limits backdoor Roth IRA potential · RMDs increase taxable income in retirement · Not the most efficient to receive as a beneficiary due to embedded tax liability · Recent elimination of stretch IRA (account must be liquidated by beneficiary within 10 years) · Complicated rules

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What to do next

Before opening a traditional IRA, you will need to evaluate your entire financial situation. This means looking at your assets, income, tax filing status, and then determining if you’re covered by a retirement plan at work.

A traditional IRA might be a great way to score a tax break and take advantage of tax-deferred growth. If you’re a high earner and ineligible for a deduction, you might consider other options. Regardless, it pays to know when a traditional IRA makes sense, and, most importantly, when it makes sense for you.

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