Saving for Your Retirement: Traditional IRAs

A Traditional Individual Retirement Account or Individual Retirement Annuity (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings. You can contribute up to the lesser of $6,000 in 2020 (unchanged from 2019), or 100 percent of your taxable compensation to a Traditional IRA. In addition, individuals age 50 and older can make an extra “catch-up” contribution of $1,000. Funds in a Traditional IRA grow tax-deferred until they are withdrawn. Contributions may be fully or partially tax deductible, depending on certain factors.

Note: You can have both a Traditional IRA and a Roth IRA but your total annual contribution to all IRAs that you own cannot be more than $6,000 in 2020 ($7,000 if you’re age 50 or older).


  • You have not reached age 70½ during the year of the contribution
  • You have taxable compensation (i.e. wages, self-employment income) during the year
  • You can deduct the full amount of your contribution provided that you are not covered by an employer-sponsored retirement plan
  • If you are covered by an employer-sponsored retirement plan, your IRA deduction (if any) depends on your modified adjusted gross income (MAGI) and your federal income tax filing status

You will be entitled to a partial deduction in 2020 if your MAGI is less than:

  1. $75,000 if your filing status is single or head of household (less than or equal to $65,000 for a full deduction)
  2. $124,000 if your filing status is married filing jointly (less than or equal to $104,000 for a full deduction)
  3. $10,000 if your filing status is married filing separately (full deduction not available)

Note: These income ranges are for the 2020 tax year, and are indexed for inflation.

Key strengths

  • Deductible contributions are made on a pretax basis
  • Funds in traditional IRAs grow tax-deferred until they are withdrawn
  • IRAs offer a wide range of investment choices
  • $1,283,025 (as of April 1, 2016) (and in some cases more) of IRA assets are protected in the event of bankruptcy under federal law

Key tradeoffs

  • Your ability to deduct contributions may be reduced or eliminated if you are covered by an employer-sponsored retirement plan
  • Funds you withdraw from a Traditional IRA are taxable income in the year received (to the extent that the withdrawal consists of deductible contributions and investment earnings)
  • Withdrawals taken before age 59½ may be subject to a 10 percent premature distribution tax (subject to certain exceptions)
  • Minimum annual withdrawals are required when you reach age 72 (required minimum distributions)
  • Taxable portion of distributions will be taxed at ordinary income rates even if funds represent long-term capital gains or dividends paid on stock held within the IRA

Variations from state to state

  • States vary in their protection of IRAs from creditors
  • States differ in their tax treatment of IRAs

How is it implemented?

  • Open an IRA with a bank, financial institution, mutual fund company, life insurance company or stockbroker
  • Select types of investments to fund the IRA (e.g., CDs, mutual funds, annuities)
  • Make contributions up to the due date of your federal income tax return for that year (usually April 15 of the following year), not including extensions

Investing for Retirement

Keep in mind…

  • A well-diversified portfolio can help balance risk
  • The earlier you start investing, the more you can contribute over the course of your working lifetime
  • By starting early, your investments will have a longer period of time to compound
  • With a longer time frame, you will have a larger choice of investment possibilities

What to do…

  • Assess your risk tolerance
  • Determine your investing time frame
  • Determine the amount of money you can invest
  • Choose investments that are appropriate for your risk tolerance and time horizon
  • Seek professional management, if necessary