What Is a Traditional IRA?

A traditional IRA is a useful retirement tool to save for your future.

Written by Hilary Collins / July 27, 2022

Quick Bites

  • A traditional IRA allows you to save for retirement while avoiding taxes.
  • You can open an IRA at any time, at any age, and at any income level—all you need to qualify is taxable income.
  • You can start using your IRA as early as age 59 ½, but you might be able to withdraw early without penalties to buy a home, fund higher education, or adopt a child.

IRAs—the acronym stands for individual retirement accounts—are a popular way to save for retirement, with almost 29% of U.S. households owning a traditional IRA.[1] Here’s what a traditional IRA is, how it works, and some of the pros and cons of this particular kind of retirement account.

What is a traditional IRA?

A traditional IRA is a retirement tool that allows you to deposit money before taxes into an investment account. There are no income or age limits for opening a traditional IRA—you just need to make taxable income.[2]


The IRA doesn’t approve IRA investments, so if you receive a sales pitch for an “IRA-approved” or “IRS-approved” IRA investment, it’s likely a scam.[3]

Banks, mutual funds, life insurance companies and stockbrokers offer IRAs. Like 401(k) plans, the funds come out of your compensation before taxes and you’re taxed when you take them out. This saves you money up front and allows your investments to grow and compound over the years.

Depending on whether or not your work offers a retirement plan, what your income is and what your filing status is with the IRS, you may be able to deduct all or part of the money you put in your IRA.[4] For instance, if you contribute $2,000 to your IRA one year, you may be able to claim that $2,000 as a deduction on that year’s income taxes, saving even more money on taxes.

How does a traditional IRA work?

The money you put into an IRA is called a contribution, and the total amount you can contribute per year is limited by the IRS. For 2022, those numbers are:

  • $6,000 if you’re 49 or younger

  • $7,000 if you’re 50 or older[5]

However, that limit doesn’t apply to rollovers. A rollover is when you move an amount from one retirement plan to another, most commonly because you’re leaving the company your retirement plan was hosted by. Rollovers are usually not taxed, but, just like the rest of your IRA funds, will be taxed when you withdraw.[6]

Starting when you turn 59 ½, you can take distributions—that is, payments—from your IRA without getting hit by a 10% penalty. Then when you turn 72, you will be required to take distributions from your IRA of a minimum amount specified by the IRS each year. That’s called a required minimum distribution (RMD) and the amount you’re required to take out will depend on the amount you have in your IRA, your age, your spouse’s age and your life expectancy.[7]

Required Minimum Distribution, or RMD, Explained

Required Minimum Distribution, or RMD, Explained

Knowing what required minimum distributions, or RMDs, are and how to use them is key for making the most of your retirement income.

Find out more

As mentioned above, there are penalties for taking money from your IRA before you reach the age of 59 ½. Any money you take out will be included in your taxable income and charged a 10% penalty. However, there are some cases in which you could receive a hardship distribution and avoid the penalty. Some of those circumstances include:

  • Medical expenses

  • Buying a home

  • Tuition and other educational expenses

  • Payments necessary to prevent eviction

  • Funeral expenses

  • Some home repairs[8]


Hardship distributions are based on an “immediate and heavy” financial need. The IRS doesn’t consider consumer purchases (like a new computer), expenses that could have been reasonably foreseen, or voluntary expenses to fit this definition.

Pros and cons of IRAs

There are a lot of positive reasons why people use traditional IRAs for their retirement savings, but that doesn’t mean it’s the right choice for you. Let’s take a look at some of the upsides and downsides of traditional IRAs.


  • IRAs allow you to save on taxes while saving for retirement

  • You can determine and easily change what investments are made with your IRA, whether that be stocks, bonds, mutual funds, CDs or other investments

  • IRAs are available to everyone and easy to set up


  • You can’t take a loan from your IRA like you can from your 401(k) plan

  • Sometimes your IRA can be garnished to pay off outstanding debts[10]

IRAs can be an excellent tool to prepare you financially for retirement. Talk to your financial advisor and do some research to make sure a traditional IRA is your best choice as a retirement investment.

Article Sources
  1. “The Role of IRAs in US Households’ Savings for Retirement,” January 2021, Investment Company Institute. https://www.ici.org/doc-server/pdf%3Aper27-01.pdf
  2. “Publication 590-A,”Internal Revenue Service. https://www.irs.gov/publications/p590a#en_US_2021_publink1000230354
  3. “The IRS Does Not Approve IRA Investments,” 2017, Internal Revenue Service. https://www.irs.gov/pub/irs-pdf/p3125.pdf
  4. “IRA Deduction Limits,” Nov. 5, 2021, Internal Revenue Service. https://www.irs.gov/retirement-plans/ira-deduction-limits
  5. “Retirement Topics- IRA Contribution Limits,” Nov. 27, 2021, Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  6. “Rollovers of Retirement Plan and IRA Distributions,” June 16, 2022, Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  7. “Required Minimum Distribution Worksheets,” April 27, 2022, Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets
  8. “Retirement Topics - Hardship Distributions,” April 27, 2022, Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions
  9. “Hardships, Early Withdrawals, and Loans,” April 27, 2022, Internal Revenue Service. https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
  10. “Advantages and Disadvantages of IRA Accounts,” Franklin Mint Federal Credit Union. http://learning.fmfcu.org/page.php?b=24543250-0&c=1051

About the Author

Hilary Collins

Hilary Collins

Hilary is an experienced finance writer with a passion for turning complicated topics into readable stories with real-world takeaways.

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