What is a Traditional IRA in the United States?

A traditional Individual Retirement Account (IRA) is a personal savings plan that offers tax advantages to help you save for retirement. Traditional IRAs are established by individual taxpayers, and contributions can be made by the taxpayer or on behalf of the taxpayer by a spouse.

Tax benefits: Contributions to a traditional IRA may be tax-deductible, and all earnings grow tax-deferred until withdrawals begin at age 59 1/2 or later.

How it works: Once you have established a traditional IRA, you can make annual contributions of up to $6,000 ($7,000 if you’re 50 or older). Your contributions and any earnings remain in the account until you withdraw them. You can withdraw contributions anytime without penalty, but you’ll pay taxes and a 10 percent penalty on earnings if you withdraw them before age 59 1/2.

Roth vs. traditional IRA: A key difference between Roth and traditional IRAs is how they’re taxed. With a traditional IRA, your contributions may be tax-deductible, but withdrawals in retirement are taxed as income. With a Roth IRA, your contributions are made with after-tax dollars, so you don’t get a deduction, but withdrawals in retirement are tax-free.