What Is a Traditional IRA and How Does It Work?

A traditional IRA is a tax-advantaged retirement account that lets you set aside earned income now, defer taxes on both your contributions and their growth, and pay ordinary income tax on the money only when you withdraw it in retirement. For 2026, you can contribute up to $7,500, or $8,600 if you’re 50 or older, and depending on your income and whether you or your spouse have a workplace retirement plan, some or all of that contribution may be deductible on your tax return.¹ Investments inside the account grow without being taxed each year, giving compounding a meaningful head start over a regular brokerage account.

Who Can Contribute

The one hard requirement is earned income. Wages, salaries, tips, bonuses, self-employment income, and commissions count. Passive income does not: dividends, interest, rental income, child support, pension payments, and annuity payments are all excluded.²

There is no age limit. The SECURE Act removed the old rule that shut off contributions after age 70½, so anyone with qualifying earned income can contribute at any age.³

Married couples filing jointly get an extra option. A non-working spouse can fund their own traditional IRA using the working spouse’s income, up to the same annual limit that applies to anyone else, as long as the couple’s combined taxable compensation on the joint return is at least equal to both spouses’ total IRA contributions. This is the Kay Bailey Hutchison Spousal IRA.⁴

If you’re self-employed, your earned income for IRA purposes is your net self-employment income minus the deductible portion of your self-employment tax, which is essentially half of what you pay in Social Security and Medicare taxes on that income.⁵

2026 Contribution Limits and Deadlines

The annual limit for 2026 is $7,500. Savers age 50 and older can add a $1,100 catch-up contribution for a total of $8,600.¹ The catch-up amount now adjusts for inflation each year under SECURE 2.0, which is why it moved off the flat $1,000 that had applied for years.

Two limits sit on top of that number. First, the cap is combined across all your traditional and Roth IRAs, not per account.⁶ Second, you can never contribute more than your taxable compensation for the year. If you earned $4,000, that’s your personal ceiling regardless of what the IRS allows.

You have until the federal tax filing deadline, generally April 15 of the following year, to make contributions for a given tax year. Contributions for 2026 can be made through April 15, 2027. Filing a tax extension does not push this date; the April 15 deadline for IRA contributions is firm even when you have extra time to file your return.⁶

How the Tax Deduction Works

The deduction is the headline feature. You subtract your contribution from your gross income on your return, which directly cuts what you owe for that year.² Whether you get the full deduction depends on two things: whether you or your spouse have access to a retirement plan at work, and how much you earn.

If neither spouse is covered by a workplace retirement plan, the whole contribution is deductible no matter how high your income.⁷ The phase-outs only apply when a workplace plan is in the picture.

2026 Deduction Phase-Out Ranges

When you or your spouse are covered by an employer plan, the deduction phases out based on Modified Adjusted Gross Income:

Single or head of household, covered by a workplace plan: full deduction at MAGI of $81,000 or less, partial deduction between $81,000 and $91,000, no deduction above $91,000.¹
Married filing jointly, contributing spouse covered: full deduction at MAGI of $129,000 or less, partial deduction between $129,000 and $149,000, no deduction above $149,000.¹
Married filing jointly, only your spouse is covered: full deduction at MAGI of $242,000 or less, partial deduction between $242,000 and $252,000, no deduction above $252,000.¹

Earning too much to deduct doesn’t stop you from contributing. Your money still grows tax-deferred inside the account. You just don’t get the up-front break, which makes tracking your cost basis important.

Nondeductible Contributions and Form 8606

When your income exceeds the phase-out range, your contribution is nondeductible. You’ve already paid tax on that money, and you shouldn’t be taxed on the same dollars again when you withdraw them later. The IRS won’t know the difference unless you tell them.

Form 8606 does that job. File it with your tax return for any year you make a nondeductible contribution to a traditional IRA. The form tracks your “basis,” meaning the running total of after-tax dollars you’ve put in. Skipping it triggers a $50 penalty, but the bigger risk is losing the basis record entirely and paying tax twice on the same money years down the road.⁸ Keep every Form 8606 you file. You’ll need them at distribution time to prove which portion of each withdrawal is tax-free.

Withdrawals in Retirement and Before 59½

Every dollar you withdraw from a traditional IRA is taxed as ordinary income at your current federal rate. This applies both to your original contributions (assuming they were deducted) and to any investment growth.

Take money out before age 59½ and you’ll owe an additional 10% penalty on top of the regular income tax.⁹ On a $20,000 early withdrawal in the 22% bracket, that’s $4,400 in income tax plus another $2,000 in penalty. Early withdrawals should be a last resort.

Exceptions to the 10% Early Withdrawal Penalty

The IRS waives the 10% penalty (though not the income tax) in a number of situations:⁹

Total and permanent disability.
Up to $10,000 lifetime toward a first home purchase.¹⁰
Qualified higher education expenses for you, your spouse, or your children.
Unreimbursed medical expenses above 7.5% of your adjusted gross income.
Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 consecutive weeks.
A series of substantially equal periodic payments based on your life expectancy, taken for at least five years or until you turn 59½, whichever is longer.
Amounts levied by the IRS to satisfy a tax debt.
Up to $5,000 per child within one year of a birth or finalized adoption.

SECURE 2.0 added several more exceptions effective after 2023, including withdrawals for domestic abuse (up to the lesser of $10,000 or 50% of your balance, with self-certification), one emergency personal expense of up to $1,000 per calendar year, and up to $22,000 for individuals with economic losses from a federally declared disaster.⁹

Required Minimum Distributions

A traditional IRA can’t shelter money from taxes forever. Eventually the IRS makes you start taking annual withdrawals, called Required Minimum Distributions. The starting age depends on when you were born:

Born before 1951: RMDs already started under the old thresholds of 70½ or 72.
Born 1951 through 1959: RMDs begin at age 73.¹¹
Born 1960 or later: RMDs begin at age 75.¹¹

The required amount each year is your account balance as of December 31 of the prior year divided by a life expectancy factor from IRS tables. Miss an RMD or take less than required and you owe a 25% excise tax on the shortfall. Correct the mistake within two years and that penalty drops to 10%.¹²

Rollovers From Other Retirement Accounts

Moving money into a traditional IRA from a 401(k) or another IRA is common, and there are two ways to do it. The mechanics matter.

A direct trustee-to-trustee transfer moves the money straight from one financial institution to another without you touching it. Nothing is withheld for taxes, and there’s no limit on how often you can do this.¹³ This is the cleanest route.

An indirect (60-day) rollover works differently. The custodian sends the money to you, and you have 60 days to redeposit it into another IRA or retirement plan. Distributions from an employer plan have 20% withheld for taxes; distributions from an IRA have 10% withheld unless you opt out. To avoid owing tax on the withheld portion, you have to cover that amount out of pocket and deposit the full original sum. Miss the 60-day window and the entire distribution becomes taxable, potentially with the 10% early withdrawal penalty added on. You’re also limited to one indirect IRA-to-IRA rollover per 12-month period across all your IRAs; direct transfers and rollovers from employer plans don’t count against that limit.¹³

What Happens When You Inherit a Traditional IRA

The rules for inherited IRAs changed substantially under the SECURE Act for owners who died in 2020 or later, and what a beneficiary must do depends on their relationship to the original owner.

A surviving spouse has the most flexibility. They can roll the inherited IRA into their own IRA and treat it as theirs, delay RMDs until their own required beginning date, or take distributions based on their life expectancy.¹⁴

Most other individual beneficiaries must empty the account within 10 years of the original owner’s death. There’s no required schedule within that window, but the balance must reach zero by the end of the tenth year. A narrow group of “eligible designated beneficiaries” can still stretch distributions over their own life expectancy: minor children of the deceased (until they reach the age of majority), disabled or chronically ill individuals, and anyone not more than 10 years younger than the original owner.¹⁴

What You Can’t Do With a Traditional IRA

An IRA is meant to be an arm’s-length investment account, not a personal piggy bank. The IRS treats any improper use of the assets by you, your beneficiaries, or certain related parties as a prohibited transaction. Common violations include borrowing from your IRA, selling personal property to it, and using it as collateral for a loan.¹⁵ The penalty is severe: the whole IRA can be treated as distributed, meaning income tax on the full balance plus the 10% early withdrawal penalty if you’re under 59½.

Certain investments are off-limits, too. You can’t hold collectibles in an IRA, which includes artwork, rugs, antiques, gems, stamps, coins (with limited exceptions for certain U.S.-minted coins), and alcoholic beverages. Gold, silver, platinum, and palladium bullion meeting certain fineness requirements are allowed, but only if held by a qualifying trustee or custodian.¹⁶

Traditional IRA vs. Roth IRA

The most common follow-up question is whether a Roth IRA would be a better fit. The fundamental difference is when you pay taxes. A traditional IRA gives you a break now and taxes withdrawals in retirement. A Roth IRA gives no up-front deduction, but qualified withdrawals in retirement come out tax-free.

How the key features compare:

Contributions: traditional IRA contributions may be tax-deductible; Roth contributions are always after-tax.
Withdrawals: traditional IRA distributions are taxed as ordinary income; Roth withdrawals of contributions are always tax-free, and earnings are tax-free after age 59½ as long as the account has been open at least five years.
Income limits for contributing: anyone with earned income can contribute to a traditional IRA regardless of income (deductibility may be limited); Roth IRAs cap direct contributions by income.
Required minimum distributions: traditional IRAs require RMDs starting at 73 or 75; Roth IRAs have no RMDs during the original owner’s lifetime.
2026 contribution limits: both accounts share the same $7,500 limit, or $8,600 if 50 or older.⁶

The general rule of thumb: if you expect your tax rate to be lower in retirement than it is now, the traditional IRA’s up-front deduction is more valuable. If you expect your rate to be the same or higher, the Roth’s tax-free withdrawals tend to win. Younger workers early in their careers often benefit more from a Roth, while higher earners approaching peak income years may get more from the traditional IRA deduction. Which one is better depends entirely on your tax trajectory.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 USC 219 – Retirement Savings
3
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
4
Internal Revenue Service. Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
5
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
6
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
7
Internal Revenue Service. IRA Deduction Limits
8
Internal Revenue Service. Instructions for Form 8606
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs
11
Congress.gov. Required Minimum Distribution (RMD) Rules for Original Owners
12
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
13
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
14
Internal Revenue Service. Retirement Topics – Beneficiary
15
Internal Revenue Service. Retirement Topics – Prohibited Transactions
16
Internal Revenue Service. Investments in Collectibles in Individually Directed Qualified Plan Accounts