Traditional IRA

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Flag of the United States.svg.png This article contains details specific to United States (US) investors. It may not apply to non-US investors.

An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also open an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements.[1]

ICI (Investment Company Institute) reports that at year end 2018, Traditional IRA's held an estimated $8.806 trillion of investor's wealth accounting for 85% of total IRA assets,[2][note 1]

Types of IRAs

The Traditional IRA was created in 1974 with the passage of the Employee Retirement Income Security Act (ERISA)[note 2] Over the years, the Traditional IRA has been expanded to include a growing number of specialized plan types. These include:

There are two basic types of personal IRA's: Traditional and Roth. See Roth versus Traditional for more guidance.

Traditional IRA Roth IRA
  • Available to everyone with earned income[note 3]
  • Penalty free withdrawals can begin at age 59 1/2 and are mandatory by 70 1/2. [note 4]
  • Taxes are paid on earnings when withdrawn from the IRA.
  • Withdrawals before age 59 1/2 are subject to a 10% penalty (subject to exceptions).
  • There is no "Step Up in Basis" on death: heirs pay tax at their regular rate.
  • Contributions made to a Traditional IRA qualify for the Retirement Savings Contributions Credit (Saver's Credit) if you meet the filing and income requirements.[3]
  • Contributions may be made only by those having earned income and making under a certain income; anyone can convert a Traditional IRA to a Roth. Contributions are not tax-deductible.
  • Principal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions).
  • After Age 59 1/2, all earnings and principal are tax free (subject to some minimal conditions).
  • There is no mandatory distribution age for the account owner, or in the case of a spousal rollover.
  • Contributions made to a Roth IRA qualify for the Retirement Savings Contributions Credit (Saver's Credit) if you meet the filing and income requirements.[4]

Contribution Eligibility and Limits

An individual can contribute to a Traditional IRA up to the year one reaches 70 1/2. The individual must have earned income (wage or business) in order to contribute to a Traditional IRA. Married taxpayers filing joint returns can contribute to a Spousal IRA for the non-working spouse, assuming sufficient earned income. Contributions can be made into an IRA up to the due date of an individual's tax return. For example, most taxpayers can make 2011 IRA contributions up through April 15, 2012. Starting in 2008, the annual contribution limits have been indexed to inflation in $500 increments. Taxpayers age 50 and above are entitled to make additional "catch-up" contributions to their IRAs. Contributions are limited to the following annual amounts:

Maximum IRA contributions[5]
Tax Year Maximum Contribution (Under age 50) Maximum Contribution (Age 50 and Older)
2007 $4,000 $5,000
2008 - 2012 $5,000 $6,000
2013 - 2018 $5,500 $6,500
2019 - 2020 $6,000 $7,000

If you or your spouse are covered by an employer provided plan through your employer, your deductible IRA contribution may be limited according to the amount of one's modified adjusted gross income, defined as:

Modified AGI
1.Subtract the following:
  • Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.
  • Minimum required distributions from IRAs, (for conversions only).

2. Add the following deductions and exclusions:

  • Traditional IRA deduction,
  • Student loan interest deduction,
  • Tuition and fees deduction,
  • Domestic production activities deduction,
  • Foreign earned income exclusion,
  • Foreign housing exclusion or deduction,
  • Exclusion of qualified bond interest shown on Form 8815, and
  • Exclusion of employer-provided adoption benefits shown on Form 8839. [6]

The following tables show deductible income limits for individuals, based on filing status and whether they are or are not covered by an employer plan: [7]

Income limits for IRA deductions (Married)
Tax Year Covered by Employer Plan Not Covered by Employer Plan
Married/Joint Full Deduction Married/Joint Partial Deduction Married/Joint Full Deduction Married/Joint Partial Deduction
2008 Below $85,000 $85,000–$105,000
2009 Below $89,000 $89,000-$109,000
2010 Below $89,000 $89,000-$109,000
2011[8] Below $90,000 $90,000-$110,000
2012[9] Below $92,000 $92,000-$112,000 Below $173,000 $173,000 - $188,000
2013 Below $95,000 $95,000-$115,000 Below $178,000 $178,000 - $188,000
2014 Below $96,000 $96,000-$116,000 Below $181,000 $181,000 - $191,000
2015 Below $98,000 $98,000-$118,000 Below $183,000 $183,000 - $193,000
2016 Below $98,000 $98,000-$118,000 Below $184,000 $184,000 - $194,000
2017 Below $99,000 $99,000-$119,000 Below $186,000 $186,000 - $196,000
2018 Below $101,000 $101,000-$121,000 Below $189,000 $189,000 - $199,000
2019 Below $103,000 $103,000-$123,000 Below $193,000 $193,000 - $203,000
2020 Below $104,000 $104,000-$124,000 Below $196,000 $196,000 - $206,000
Income limits for IRA deductions (Single or Head of Household)
Tax Year Covered by Employer Plan Not Covered by Employer Plan
Single Full Deduction Single Partial Deduction Single Full Deduction Single Partial Deduction
2008 Below $53,000 $53,000–$63,000
2009 Below $55,000 $55,000-$65,000
2010 Below $56,000 $56,000–$66,000
2011[8] Below $56,000 $56,000–$66,000
2012[9] Below $58,000 $58,000-$68,000 Any amount Any amount
2013 Below $59,000 $59,000-$69,000 Any amount Any amount
2014 Below $60,000 $60,000-$70,000 Any amount Any amount
2015 Below $61,000 $61,000-$71,000 Any amount Any amount
2016 Below $61,000 $61,000-$71,000 Any amount Any amount
2017 Below $62,000 $62,000-$72,000 Any amount Any amount
2018 Below $63,000 $63,000-$73,000 Any amount Any amount
2019 Below $64,000 $64,000-$74,000 Any amount Any amount
2019 Below $65,000 $65,000-$75,000 Any amount Any amount

If one's income results in partial deductibility of contributions, one needs to refer to the appropriate tax table to determine the allowable deductible contribution. See Non-deductible Traditional IRA page for income limits based on your tax filing status.

For married couples with a MAGI between $121,000 and $199,000 in tax year 2017, the contribution result in a situation where one member of the couple is eligible to make deductible IRA contributions (such as a non-working spouse, or a spouse working part time or as a consultant or at a company without a retirement plan) while the other member of the couple (the one working at a company with a retirement plan) is not eligible for deductible IRAs, but might still be eligible for Roth IRAs.

Rollovers and Transfers

A significant amount of Traditional IRA assets and annual contributions come from the transfer or rollover of employer retirement plan assets. The Employee Benefit Research Institute (EBRI) 2018 report states that in 2016 IRA rollovers were 16 times the amount of IRA contributions. [10] These transfer/rollovers occur when an employee severs employment from the employer whether voluntarily through job switching or retiring, or through lay-offs or firings. Employees may wish to transfer an employer plan to a Traditional IRA in order to consolidate accounts, reduce plan management expense, or to retain the right to transfer the transferred assets to another employer provided plan. Transfers of Traditional IRA accounts occur in three manners:

  • Direct Trustee-to-Trustee Transfers
  • Rollovers
  • Transfers incident to a divorce

IRA rollovers and transfers can become complicated. Refer to IRA Rollovers and Transfers for detailed consideration of this topic.

Required Minimum Distributions

With a traditional IRA, starting with the calendar year you reach age 70½, you must withdraw at least a minimum amount each year. This is called your Required Minimum Distribution (RMD). For your very first RMD you have until April 1 of the calendar year following the year you turn 70½ to take the RMD. For each subsequent year, you'll need to take your annual RMD by December 31 of that year. But be aware that if you delay your initial RMD until April 1 of the year after you turn 70½, you will end up taking (and being taxed on) two RMDs that year. Thus delaying your initial RMD may act to needlessly push you up into a higher tax bracket.

The Required Minimum Distribution rules for participants in employer plans have a minor difference from those of traditional IRAs. Persons who are still working at age 70½ can wait until April 1 of the calendar year following the year they retire to perform their first RMD.

Another twist to be cognizant of is that for each calendar year you are required to take a RMD, the RMD must be the first money to leave the account(s). For example, if you wanted to perform a Roth conversion from a traditional IRA account in a calendar year that also has a RMD, the RMD must be completed before you perform a subsequent Roth conversion. If you reverse this sequence, the IRS will consider you to have improperly contributed RMD funds into the Roth account. This twist can cause particular problems for the year you turn 70½, since you have until April 1 of the following year to complete the RMD, but can't perform a Roth conversion until the RMD is completed.[note 5]

The amount of your required minimum distribution is equal to your retirement account balance as of December 31 of the previous year (adjusted for any outstanding rollovers, asset transfers, or conversions completed during the prior year that are recharacterized in the current one) divided by your life expectancy factor according to the IRS Uniform Lifetime Table.

You may combine your IRA accounts (non-inherited) for the purposes of calculating the RMD. 403(b) plans have similar rules. However, 401(k) and 457(b) plans must take the distributions separately from each account.

Penalties: Early Withdrawals and Excess Contributions

Early Withdrawals

Early withdrawals are generally amounts distributed from your traditional IRA account before you are age 59 1/2. You must pay a 10% additional tax on the distribution of any assets from your traditional IRA before you are age 59 1/2.

Exceptions to the penalty apply if the early withdrawal is:
  • made to a beneficiary or estate on account of the IRA owner's death,
  • made on account of disability,
  • made as part of a series of substantially equal periodic payments over your life or life expectancy,
  • made to pay for a qualified first–time home purchase,
  • not in excess of your qualified higher education expenses,
  • not in excess of certain medical insurance premiums paid while unemployed,
  • not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income, or
  • due to an IRS levy.

Excess Contributions

Contributing more than the allowed amount in any year to your traditional IRA also subjects you to an additional tax. Any excess contribution not withdrawn by the date your tax return for the year is due (including extensions) is subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year.


  1. Traditional IRA assets 1997 - 2018 (in billions). Source: Investment Company Institute Factbooks.
    • Share is the percentage of total IRA assets.
    • Traditional IRAs include contributory and rollover IRAs.
    • ᵉ Data are estimated.

    Sources: Investment Company Institute, Internal Revenue Service Statistics of Income Division, and Government Accountability Office

  2. See "The Individual Retirement Account at Age 30: A Retrospective". Perspective, V11, N1. Investment Company Institute. February 2005. for a history of the Traditional IRA to 2003.
  3. Tax-deductibility depends on income level. See Non-deductible Traditional IRA for more information.
  4. Penalty free withdrawals can also be made by instituting a defined series of Substantially Equal Periodic Payments from an IRA. See SEPP:Substantially Equal Periodic Payments.
  5. See the article Age 70½ Confusion for Retirement Accounts for an excellent discussion, with illustrative examples, of how RMDs can interact with Roth conversions, rollovers and direct trustee transfers.

See also


External links