Accounts · Investing Glossary
What Is Traditional IRA?
A retirement account funded with pre-tax dollars; you pay taxes when you withdraw.
The Full Definition
A Traditional IRA allows you to contribute pre-tax dollars (reducing your taxable income today) and defer taxes until you withdraw the money in retirement. The same contribution limits apply as a Roth IRA: $7,500/year ($8,600 if 50+) for 2026. A Traditional IRA makes the most sense if you expect to be in a lower tax bracket in retirement than you are now — you save taxes at today's higher rate and pay them at a lower future rate.
Real-World Example
Contributing $7,500 to a Traditional IRA while in the 24% tax bracket saves you $1,800 in taxes this year. But when you withdraw in retirement from a lower bracket, you'll pay less. The key trade-off vs. a Roth: tax now or tax later.
Related Terms
- Roth IRAA retirement account funded with after-tax dollars; growth and withdrawals are tax-free.
- 401(k)An employer-sponsored retirement savings plan with pre-tax contributions and potential employer match.
- Required Minimum Distribution (RMD)The minimum amount the IRS requires you to withdraw annually from certain retirement accounts after a certain age.
- Tax-DeferredInvestment growth that isn't taxed until money is withdrawn, typically in retirement.