Traditional IRA
A traditional IRA (Individual Retirement Account) is a tax-deferred retirement account. Contributions may be tax-deductible (depending on income and whether you have a workplace plan), and withdrawals in retirement are taxed as ordinary income.
Contributing $6,000 at a 22% marginal rate saves $1,320 in taxes now. That $6,000 grows tax-deferred until retirement.
The 2025 contribution limit is $7,000 ($8,000 if age 50+). Deductibility phases out if you or your spouse have a workplace retirement plan and your income exceeds certain thresholds ($79,000 single / $126,000 MFJ in 2025).
Traditional IRAs grow tax-deferred — you don't pay taxes on dividends, interest, or capital gains until you withdraw. Required Minimum Distributions (RMDs) begin at age 73 under SECURE Act 2.0.
Compared to a Roth IRA: traditional is better if you expect to be in a lower tax bracket in retirement than you are now (defer taxes from a high-rate year to a lower-rate year). Roth is better if you expect to be in the same or higher bracket later.
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- Roth IRA
- A Roth IRA is a US individual retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free.
- 401(k)
- A 401(k) is a US employer-sponsored retirement savings account. Contributions are pre-tax (traditional) or post-tax (Roth), grow tax-deferred or tax-free, and benefit from compound growth over decades.
- Required Minimum Distribution (RMD)
- A required minimum distribution (RMD) is the minimum amount the IRS requires you to withdraw from traditional retirement accounts (401k, traditional IRA) each year starting at age 73.
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.