What is a Traditional IRA?

A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement.  Contributions to a traditional IRA may be tax deductible – either in whole or in part.  Also, the earnings on the amounts in your IRA are not taxed until they are distributed.  The portion of the contributions that was tax deductible also does not get taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies and brokerage firms.

A Traditional IRA is an individual retirement account (IRA) in the United States. The IRA is held at a custodian institution such as a bank or brokerage, and may be invested in anything that the custodian allows (for instance, a bank may allow certificates of deposit, and a brokerage may allow stocks and mutual funds).

The main advantage of a Traditional IRA, compared to a Roth IRA, is that contributions are often tax-deductible.   All United States taxpayers can make IRA deposits and defer the taxation of earnings. If a taxpayer’s household is covered by one or more employer-sponsored retirement plans, then the deductibility of traditional IRA contributions are phased out as specified income levels are reached.  To be eligible, you must meet the earned income minimum requirement. In order to make a contribution, you must have taxable compensation (not taxable income from investments). If you make only $2000 in taxable compensation, your maximum IRA contribution is $2000.

Contributions: For 2012, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

  • $5,000 ($6,000 if you are age 50 or older), or
  • Your taxable compensation (defined earlier) for the year.