Traditional IRAs in plain English
A traditional IRA is an individual retirement arrangement that can receive regular contributions, rollovers, and transfers. Contributions may be deductible, while earnings generally grow tax-deferred until distribution.
“Traditional” describes the federal tax framework, not the investment. An IRA can hold cash, funds, stocks, bonds, and other permitted investments depending on the custodian.
A contribution can be fully deductible, partly deductible, or nondeductible. The account label alone does not determine the tax result.
2026 contribution limit
For 2026, total regular contributions across all of one person's traditional and Roth IRAs are limited to the lesser of:
- $7,500, or $8,600 if age 50 or older; and
- eligible taxable compensation for the year.
The limit is shared across account types and custodians. Contributing $7,500 to a traditional IRA generally leaves no regular Roth IRA room for that person in 2026.
Rollovers do not use the regular contribution limit when completed correctly.
Eligibility to contribute
An individual generally needs taxable compensation, such as wages or net self-employment income, to make a regular contribution. There is no maximum age for regular traditional IRA contributions under current law.
A married couple filing jointly may be able to fund an IRA for a spouse with little or no compensation if combined eligible compensation is sufficient. Each spouse owns a separate account and limit.
Participation in a workplace retirement plan does not prohibit a traditional IRA contribution; it can limit the deduction.
When contributions are deductible
If neither the contributor nor spouse is covered by a workplace retirement plan, a traditional IRA contribution is generally deductible, subject to other rules.
If the contributor or spouse is covered at work, the deduction can phase out based on modified adjusted gross income and filing status. Thresholds change annually.
Coverage is indicated by retirement-plan information on Form W-2 and specific IRS rules, not simply whether the employee personally contributed.
Use the current IRS deduction worksheet rather than assuming every traditional contribution lowers taxes.
Nondeductible contributions and basis
A person can make a nondeductible traditional IRA contribution when eligible even if the deduction is limited. The after-tax amount creates basis that should not be taxed again when distributed.
Form 8606 reports nondeductible contributions and tracks basis. Custodians generally do not calculate the owner's aggregate basis.
Failing to file and retain Form 8606 can lead to double taxation or difficulty substantiating basis years later.
The aggregation and pro-rata rules
For tax calculations, the IRS generally aggregates all of a person's traditional, SEP, and SIMPLE IRAs. A distribution or Roth conversion is treated as a proportional mix of pre-tax and after-tax money.
An owner cannot usually select only the nondeductible dollars from one account while ignoring pre-tax balances elsewhere.
The year-end value and distributions enter the Form 8606 calculation. Rollovers between employer plans and IRAs can therefore affect conversion tax results.
Contribution deadline
Regular IRA contributions can generally be made through the federal return filing deadline, excluding extensions, for the designated year.
Between January and the filing deadline, specify whether a deposit is for the prior or current year. Verify custodian records and Form 5498.
An extension to file generally does not create more time to make a regular contribution.
Investments and diversification
An IRA is an account wrapper. Its return comes from the assets held after expenses. Leaving a rollover in a settlement fund can create years of unintended cash exposure.
Choose a diversified allocation based on time horizon, risk capacity, other accounts, fees, and withdrawal plans. Compare fund expense ratios, trading costs, advisory fees, and cash yields.
Avoid prohibited transactions and disallowed assets, which can disqualify or distribute the account under tax rules.
Distributions and ordinary income
Deductible contributions and tax-deferred earnings are generally included in ordinary income when distributed. If the owner has basis, Form 8606 determines the tax-free and taxable portions.
A distribution before age 59½ can also face a 10% additional tax unless a statutory exception applies. An exception to the additional tax does not necessarily make the distribution exempt from ordinary income tax.
Withholding is a prepayment, not the final tax calculation.
Required minimum distributions
Traditional IRA owners generally must begin required minimum distributions at the age specified by current law. For people reaching the current threshold, the first deadline can be April 1 of the following year, while subsequent distributions are due by December 31.
Delaying the first distribution can place two taxable RMDs in one calendar year. Each IRA's RMD is calculated separately, though traditional IRA RMDs can generally be aggregated and withdrawn from one or more traditional IRAs.
RMDs are not eligible for rollover. Missing or underpaying can create excise tax, with reduced rates for timely correction under current rules.
Rollovers and transfers
A trustee-to-trustee transfer moves IRA assets directly between custodians and generally avoids the 60-day rollover rule.
A direct rollover from an eligible employer plan to a traditional IRA generally preserves tax deferral. A distribution paid to the participant can trigger mandatory withholding and requires replacing withheld funds to roll over the full eligible amount.
The once-per-12-month IRA rollover limit applies to certain 60-day IRA-to-IRA rollovers, not generally to direct transfers or plan-to-IRA rollovers. Confirm the transaction type before moving money.
Traditional IRA versus 401(k)
A 401(k) has a larger employee contribution limit, employer rules, possible matching contributions, and a plan investment menu. An IRA has the smaller shared IRA limit and broader custodian choice.
Workplace plans and IRAs can have different creditor protections, loan access, fees, early-withdrawal exceptions, and RMD treatment.
Rolling a 401(k) to an IRA is not automatically beneficial. Compare all features and conflicts before accepting a rollover recommendation.
Traditional versus Roth IRA
A deductible traditional contribution can reduce current taxable income, while future distributions are generally taxable. Roth contributions are not deductible, while qualified distributions can be tax-free.
The decision depends on marginal tax rate now and later, deduction eligibility, state taxes, time horizon, RMDs, credits, estate goals, and access to cash for taxes.
Tax diversification can be valuable, but splitting contributions does not expand the shared annual IRA limit.
Beneficiaries and inherited IRAs
Beneficiary designations can control distribution and should be coordinated with the estate plan. Inherited IRA rules differ for spouses, eligible designated beneficiaries, other individuals, trusts, estates, and charities.
Many nonspouse beneficiaries are subject to a 10-year distribution framework, with additional annual-distribution requirements in some cases. A spouse may have options unavailable to others.
Do not combine an inherited IRA with an owned IRA without confirming the rules.
Excess contributions
An excess contribution can result from exceeding the shared limit, lacking sufficient compensation, or depositing for the wrong year. The IRS generally imposes a 6% excise tax for each year an excess remains, subject to statutory limits.
Correction can require removing the contribution and attributable earnings or applying an eligible amount to a later year. Recharacterization may be available for regular IRA contributions under current rules.
Coordinate the custodian reporting and tax return rather than making an undocumented withdrawal.
A traditional IRA checklist
Before contributing or rolling over:
- verify compensation and the shared IRA limit;
- determine workplace-plan coverage and deduction eligibility;
- decide whether the contribution is deductible;
- file Form 8606 for any nondeductible amount;
- invest according to a written allocation;
- compare rollover alternatives and fees; and
- review beneficiaries and RMD obligations.
The tax deferral is valuable only when records, investments, fees, and withdrawals are managed correctly.