Traditional IRAs provide tax-deferred growth. This means your money grows tax-free until you begin taking distributions, at which point your withdrawals are taxed at your income tax rate.1 What’s more, contributions may be tax-deductible. For instance, if you make $40,000 per year and put $3,000 in a traditional IRA, you will generally receive a deduction against your $40,000 of income.
For 2021, if you are covered by a workplace retirement plan, your contributions are at least partially deductible if your modified adjusted gross income is less than $76,000 if you are single or $125,000 if you are married and filing jointly. The income limits are higher if your spouse is covered by a workplace retirement plan but you are not. However, if neither you nor your spouse are covered by a workplace retirement plan, your contributions are deductible no matter what your income is.
A traditional IRA can be useful for those who don’t qualify for a Roth IRA (see next section), for those who anticipate being in a lower tax bracket after retirement and for those who want to save outside their 401(k). It makes sense to invest enough in your 401(k) to get the full matching contribution from your employer, if they offer one. Beyond that, IRAs may offer more investment flexibility than many 401(k)s, though you should learn the details of your 401(k) to be sure. Anyone with earned income2 is eligible to open a traditional IRA. If you withdraw funds from your traditional IRA before age 59½, however, you generally have to pay income tax on any tax-deductible contributions and earnings, and an additional 10 percent tax on your withdrawal—though some exceptions may apply.