Definition
A Traditional IRA is an individual retirement account funded with pre-tax or nondeductible contributions that grows tax-deferred.
How It Works
Contributions may be deductible depending on income and workplace plan coverage. Investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. Annual contribution limits apply and adjust over time.
Example
A worker contributes the annual limit to a Traditional IRA and, if eligible, deducts it, lowering current taxable income.
Who It Applies To
Individuals with earned income.
Watch-Outs
Deductibility phases out for higher earners covered by a workplace plan, which is why many high earners use the nondeductible contribution as the first step of a backdoor Roth. Required minimum distributions eventually apply.
