traditional ira

Traditional IRA: Contribution, Rules, & Limits 2024

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Are you trying to decide how to save for retirement? Individual retirement accounts (IRAs) offer individuals an opportunity to save and invest for retirement in a tax-advantaged manner. Among the various types of IRAs available, the traditional IRA is a popular choice due to its flexibility and potential tax benefits. In this comprehensive guide, we explore how a Traditional IRA works, the benefits, eligibility criteria, contribution limits, investment options, and more.

 

What is a traditional IRA?

A traditional IRA is a retirement savings account that allows you to contribute pre-tax income, which can grow tax-deferred until withdrawals are made during retirement. Unlike Roth IRAs, contributions to traditional IRAs can be tax-deductible, providing immediate tax benefits for eligible individuals.

This means that eligible traditional IRA contributions reduce taxable income in the year they are made, potentially lowering your current tax bill. For example, if your income is $77,000 and you contribute $7,000 to a traditional IRA, your taxable income for that year will drop to $70,000 (as long as you qualify for the tax deduction).

A traditional IRA may be a great retirement plan for you if: 

  • You want to lower your taxable income now
  • You expect to be in a lower tax bracket in retirement

     

What are the benefits of a traditional IRA?

  1. Tax deductions: Contributions to a Traditional IRA can be tax-deductible, meaning you can deduct the amount of your contribution from your taxable income for the year in which you contributed. This can lower your overall tax bill, and potentially put you in a lower tax bracket. 
  2. Tax-deferred growth: Once your money is in a Traditional IRA, it grows tax-deferred. Your contributions and investment earnings within the account are not taxed until you withdraw them. This can allow your investments to grow more quickly over time compared to a taxable account.
  3. Lower current tax liability: If you’re in a higher tax bracket now than you expect to be in during retirement, you will pay less tax on your money overall. 
  4. No income limits for contributions: Unlike Roth IRAs, which have income limits for contributions, anyone with earned income can contribute to a Traditional IRA, regardless of income level. The income limit is whether you can deduct those contributions from your tax return.
  5. Spousal IRA contributions: If you’re married and file a joint tax return, you can contribute to a Traditional IRA on behalf of a non-working spouse, effectively doubling the tax-advantaged retirement savings for your household.

What are the disadvantages of a traditional IRA?

  1. Taxes during retirement: All traditional IRA withdrawals in retirement are taxed as ordinary income. This can result in a higher tax burden during retirement, especially if your tax rate is the same or higher than when you made contributions.
  2. Early withdrawal penalty: If you withdraw before you reach 59½ years of age, you may be subject to a 10% penalty, in addition to income tax on the amount withdrawn.
  3. Contribution limits: Traditional IRA contributions are subject to annual limits set by the IRS. 
  4. Mandatory RMDs after age 73:  If you don’t take RMDs, then you are subject to a 50% excise tax on the amount that you should have withdrawn. 
  5. No contribution flexibility: Unlike Roth IRAs, traditional IRAs don’t offer the flexibility to withdraw contributions penalty-free at any time. All withdrawals from a traditional IRA are subject to income tax.

     

Traditional IRA eligibility

To be eligible to contribute to a Traditional IRA, you must have earned income. There are no age limits, but there are annual contribution limits and annual income limits for deducting your contributions on your tax return.

Traditional IRA max contribution

In 2024, the maximum contribution to a traditional IRA is $7,000 for individuals under 50 and $8,000 for those 50 and older. The contribution limits usually change each year, so be sure to check the latest IRS guidelines.

Traditional IRA income limits

While there are no income limits for contributing to a Traditional IRA, there are income limits for deducting your contributions on your tax return. The limits depend on your filing status, modified adjusted gross income (MAGI), and whether you or your spouse are covered by a retirement plan at work (such as a 401(k)).

2024 Traditional IRA deduction limit if you are covered by a retirement plan at work

Filing statusModified adjusted gross income (MAGI)Deduction limit
Single individuals≤ $77,000Full deduction up to the amount of your contribution limit
> $77,000 but < $87,000Partial deduction
≥ $87,000No deduction
Married (filing joint returns)≤ $123,000Full deduction up to the amount of your contribution limit
> $123,000 but < $143,000Partial deduction
≥ $143,000No deduction
Married (filing separately)< $10,000Partial deduction
≥ $10,000No deduction

2024 Traditional IRA deduction limit if you are not covered by a retirement plan at work

Filing StatusModified adjusted gross income (MAGI)Deduction limit
Single, head of household, or qualifying widow(er)Any amountA full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is not covered by a plan at workAny amountA full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is covered by a plan at work$230,000 or lessFull deduction up to the amount of your contribution limit
> $230,000 but < $240,000A partial deduction
≥ $240,000 or moreNo deduction
Married filing separately with a spouse who is covered by a plan at work< $10,000Partial deduction
≥ $10,000No deduction

Required minimum distributions (RMDs)

Once you reach age 73, you’re required to start taking withdrawals from your traditional IRA each year. These withdrawals are called required minimum distributions (RMDs), and they are based on your life expectancy and IRA account balance. It’s important to follow the RMD rules otherwise you may have to pay an excise tax of up to 50% of the amount you were supposed to withdraw. 

Traditional IRA vs other IRAs

Key differencesTraditional IRARoth IRASIMPLE IRASEP IRA
Who’s it forIndividualsIndividualsEmployeesEmployees and individuals
EligibilityNo age limit. The individual must earn at least the contribution amount.No age limit. The individual must earn at least the contribution amount.No age limit. The employer can’t have another retirement plan.Must be 21+ Must have worked for business 3 of last 5 years Minimum $750 in yearly compensation
Income limitNone$161,000 if single; $240,000 if marriedNoneNone
ContributionsPre-tax moneyAfter-tax moneyPre-tax moneyPre-tax money
Contribution limits 2024$7,000/year$7,000/year$16,000/year$69,000/year or 25% of compensation up to $345,000 (whichever is less)
Catch-up contributions for those 50+$1,000/year$1,000/year$3,500/yearNone
Taxes on Qualified withdrawalsTaxed as ordinary incomeTax-freeTaxed as ordinary incomeTaxed as ordinary income

Traditional IRA vs 401(k)

What are the differences between a traditional IRA and a 401(k)?

1. Access and eligibility:

  • Traditional IRA: Individuals can open a Traditional IRA through a financial institution. Eligibility is not tied to employment status, making it accessible to self-employed individuals and those without access to employer-sponsored retirement plans.
  • 401(k): A 401(k) is an employer-sponsored retirement plan offered by many companies to their employees. Eligibility typically requires working for an employer that offers the plan and meeting specific criteria outlined in the plan’s terms.

     

  1. Contribution limits:
  • Traditional IRA: In 2024, the annual contribution limit for Traditional IRAs is $7,000 for individuals under age 50, with an additional $1,000 catch-up contribution allowed for those aged 50 and older.
  • 401(k): In 2024, employees can contribute up to $23,000 to their 401(k) accounts, with an additional catch-up contribution of $7,500 for individuals aged 50 and older.

     

  1. Employer matching contributions:
  • Traditional IRA: Contributions to a Traditional IRA are made by the individual, and there are no employer-matching contributions.
  • 401(k): Many employers offer matching contributions to employees’ 401(k) accounts, providing an additional incentive to participate in the retirement plan.

     

  1. Tax treatment:
  • Traditional IRA: Contributions to a Traditional IRA may be tax deductible, depending on factors such as income level and participation in an employer-sponsored retirement plan. Withdrawals in retirement are taxed as ordinary income.
  • 401(k): Contributions to a traditional 401(k) are made on a pre-tax basis, reducing taxable income in the year of contribution. Withdrawals in retirement are taxed as ordinary income.

5. Investment options:

  • Traditional IRA: Investors have flexibility in choosing investments within a Traditional IRA.
  • 401(k): Investment options within a 401(k) are typically limited to a selection of funds chosen by the employer or plan administrator.


6. Withdrawal rules:

  • Traditional IRA: Withdrawals from a Traditional IRA before age 59½ may be subject to a 10% early withdrawal penalty, in addition to income tax on the withdrawn amount. RMDs must begin by age 73
  • 401(k): Similar to Traditional IRAs, early withdrawals from a 401(k) before age 59½ may incur a 10% penalty, in addition to income tax. RMDs from a 401(k) must also begin by age 73 unless the individual is still employed and not a 5% owner of the company sponsoring the plan. Roth 401(k)s aren’t subject to RMDs.

Is a traditional IRA or 401(k) better?

Determining whether a Traditional IRA or a 401(k) is better for your retirement savings depends on various factors, including your employment situation, income, investment preferences, and retirement goals. Here are some considerations to help guide your decision:

    • Employer match: If your employer offers matching contributions for your 401(k), it’s generally advisable to contribute enough to maximize the employer match before considering other retirement savings options.

    • Investment options: If you prefer a broader selection of investment choices and greater control over your investments, a Traditional IRA may be more suitable, as it offers a wider range of investment options compared to most 401(k) plans.

    • Tax considerations: If you expect to be in a lower tax bracket in retirement or anticipate higher taxes in the future, a Traditional IRA may be advantageous, as it allows for tax-deferred growth and potential tax deductions on contributions.

Can you contribute to a 401(k) and a traditional IRA at the same time?

Yes! A 401(k) and a traditional IRA are two separate accounts and you can contribute up to the maximum contribution for each.

Roth IRA or Traditional IRA

What are the differences between a traditional IRA and a Roth IRA?

1. Tax Treatment:

  • Traditional IRA contributions can be tax-deductible, while Roth IRA contributions are made with after-tax dollars.
  • Withdrawals from Traditional IRAs are taxed as ordinary income, whereas qualified withdrawals from Roth IRAs are tax-free.

  1. Income Eligibility:
  • Traditional IRAs have no income limits for contributions, but eligibility for tax-deductible contributions may be limited based on income and participation in employer-sponsored retirement plans.
  • Roth IRAs have income limits for contributions, and eligibility phases out for higher-income earners.

  1. Required Minimum Distributions (RMDs):
  • Traditional IRAs require account holders to start taking RMDs at age 73. The withdrawals are taxed as ordinary income.
  • Roth IRAs do not have RMDs during the account holder’s lifetime, allowing for continued tax-free growth and potential inheritance for beneficiaries.

     

Can you do a Traditional IRA conversion to a Roth?

Converting a Traditional IRA to a Roth IRA involves transferring funds from the Traditional IRA to the Roth IRA. This conversion is a taxable event, meaning you’ll owe income tax on the amount converted if the contributions were tax-deducted previously. A traditional IRA conversion to Roth is a significant financial decision and we recommend consulting a financial advisor before proceeding.

 

Which is better: Traditional IRA or Roth IRA?

Determining which type of IRA is better depends on individual circumstances, including current and future tax brackets, retirement goals, and financial needs.

A Traditional IRA may be preferable if you expect to be in a lower tax bracket in retirement or if you need the tax deduction now.

A Roth IRA may be preferable if you anticipate being in a higher tax bracket in retirement or if you prefer tax-free withdrawals and flexibility in retirement.

>> Are you trying to decide if you should contribute to your Roth IRA vs Traditional IRA? Here’s a FREE flowchart to help you decide.

 

Is it possible to contribute to both a Traditional IRA and a Roth IRA?

Yes, you can contribute to both types of IRA accounts concurrently. There is no limitation on the number of IRA accounts you can have. However, the 2024 limit for both traditional IRAs and Roth IRAs is $7,000 for those under 50 and $8,000 if you’re age 50 or older. This means that if you have both accounts, your total contribution cannot go over this limit.

roth ira vs traditional ira

Simple IRA vs Traditional IRA

  1. Eligibility
  • SIMPLE IRA: Typically offered by small businesses with fewer than 100 employees. Employees must have earned at least $5,000 in any two prior years and be expected to earn at least $5,000 in the current year.
  • Traditional IRA: Available to anyone with earned income.

  1. Contribution Limits
  • SIMPLE IRA: Employees can contribute up to $16,000 in 2024. Employees who are 50 and older can contribute an additional $3,500.
  • Traditional IRA: The contribution limits are lower. The maximum contribution for 2024 is $7,000 for those under 50, and $8,000 for those aged 50 and older.

  1. Employer Contributions
  • SIMPLE IRA: Employers are required to make contributions to their employees’ accounts, either through matching contributions (up to 3% of the employee’s compensation) or non-elective contributions (2% of each eligible employee’s compensation).
  • Traditional IRA: Employers do not contribute to traditional IRAs. The contributions are made by the individual.

  1. Withdrawals and Penalties
  • SIMPLE IRA: Withdrawals before age 59½ may incur a 25% early withdrawal penalty if made within the first two years of participation. After two years, the penalty is 10%.
  • Traditional IRA: Withdrawals before age 59½ may incur a 10% early withdrawal penalty, in addition to income tax on the withdrawn amount.

How to open a traditional IRA account

  1. Pick the right IRA provider. The first step to opening a traditional IRA is to pick a reliable provider such as Fidelity or Vanguard.
  2. Open your account. Once you’ve chosen a provider, you’ll need to complete the application form to open the account. You’ll need to provide personal identification information, such as your Social Security number, date of birth, and contact information.
  3. Choose your contribution amount. Decide how much money you want to put into your IRA each year. The maximum contribution limit for 2024 is $7,000 or $8,000 if you’re at least 50. Select your investments. Decide how you want to invest your contributions within your traditional IRA. Most providers offer a range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
  4. Monitor and adjust: Keep track of your traditional IRA account regularly to monitor its performance and make any necessary adjustments as needed. 
should i contribute to a traditional ira

Common Questions About Traditional IRAs

Traditional IRA contributions can be tax-deductible. However, deductibility depends on your income, filing status, and whether you or your spouse are covered by a retirement plan at work.

Even if you can’t deduct your IRA contribution from your tax return, it might still be worthwhile to contribute to a traditional IRA, also known as a non-deductible IRA. Your money can still grow tax-deferred for your retirement. Nondeductible contributions are tracked using Form 8606 on your tax return.

Nondeductible IRAs are often used by people who earn too much to contribute to a regular Roth IRA but want to utilize the Backdoor Roth IRA. With this strategy, you first contribute to a nondeductible IRA, invest your contributions, wait for some time, and then convert it to a Roth IRA, where your money grows tax-free.

Traditional IRAs offer a wide range of investment options, including stocks, bonds, mutual funds, ETFs, CDs, and more. Depending on your risk tolerance, time horizon, and financial goals, you can tailor your investment portfolio to suit your needs. We recommend working with a fee-only financial advisor who will be able to advise the best investment options for your traditional IRA.

Yes, a rollover IRA allows you to consolidate old employer-sponsored retirement plans such as a 401(k) into an IRA. However, a rollover IRA may not necessarily be the best choice. There are other options that may be better than a rollover IRA.

Generally, you can start taking funds out of your traditional IRA when you turn 59½, and you’ll pay regular income tax when you make withdrawals.  If you do withdraw funds from your traditional IRA early, you will have to pay a 10% penalty on top of income tax.

There are some exceptions to the IRA early withdrawal rule. You can check out the IRS Publication 590-B for more information on these exceptions.

If you contribute more than the annual limit to a traditional IRA, the excess contributions are subject to a 6% excise tax each year they remain in the account. If you realize that you've made excess contributions, you have until the tax filing deadline, typically April 15 of the following year, to correct the mistake and avoid further penalties. You can withdraw the excess contributions (and any associated earnings) before the deadline without penalty.

If you have designated beneficiaries, then your traditional IRA will be inherited by them when you die. If you didn’t designate a beneficiary then your traditional IRA will go through probate. Probate can be a long and complicated process so it’s important to name beneficiaries when you open a traditional IRA, if possible.

Build your retirement savings with a traditional IRA in 2024

A traditional IRA can be a valuable tool for saving and investing for retirement, offering tax benefits, flexibility, and a wide range of investment options. By contributing to a traditional IRA, you can take advantage of tax-deferred growth and potentially lower your current tax bill. However, it’s essential to understand the rules, eligibility criteria, contribution limits, and tax implications associated with Traditional IRAs before making investment decisions.

If you are interested in a comprehensive financial plan, schedule a free consultation with one of our fee-only financial planners today.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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