Traditional IRA

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A Traditional IRA (Individual Retirement Arrangement) is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your Traditional IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. See the general IRA wiki page for information which applies to all types of IRAs, including the Traditional IRA.


A Traditional IRA allows investors to make either deductible (deducted) or non-deductible (not deducted) contributions, at their option. The annual IRA contribution limit of $6,500, or $7,500 for individuals age 50 and over (as of 2023), applies to all deductible and non-deductible Traditional IRA contributions and Roth IRA contributions. When you make non-deductible contributions to a Traditional IRA, those contributions become after-tax basis within the account. Deductible contributions and all growth within the account are pre-tax, and therefore taxable as income when withdrawn. The IRS requires all withdrawals (including for Roth conversions) from a Traditional IRA to be “pro-rata” between the pre-tax and after-tax portions. For example, if you make a $1,000 withdrawal from a Traditional IRA with a balance of $10,000 and a basis of $6,000, the withdrawal will be 60% ($6,000 / $10,000) non-taxable basis and 40% pre-tax. Therefore, the basis would decrease by $600 to $5,400, and $400 of the withdrawal would be considered taxable income. A fully deductible Traditional IRA is a special case of a Traditional IRA with a basis of 0.

Growth within a Traditional IRA (eg. interest, dividends, and capital gains) is not taxable in the year it is earned. Rather, taxes on growth are fully deferred until withdrawal. This makes a Traditional IRA a good place to hold tax-inefficient investments and to perform rebalancing trades that sell appreciated investments.

Losses from a Traditional IRA – when you make a withdrawal when the balance is less than the basis – are not tax-deductible, unlike with a taxable account.

Contribution and income limits

The maximum contribution limit for 2023 is $6,500, or $7,500 for those age 50 or older; the limit for 2022 is $6,000, or $7,000 for those age 50 or older.[1] You cannot contribute more than your compensation for the year. Compensation includes wages, salaries, etc., commissions, self-employment income, taxable alimony and separate maintenance, nontaxable combat pay, taxable non-tuition fellowship and stipend payments.[2]

Married spouses can also contribute to their own IRAs, even if they did not earn any income. The total contribution for both spouses cannot be greater than the total joint compensation.

Prior to the SECURE Act of 2019, Traditional IRA owners could not make contributions after age 70½ regardless of whether they had compensation, but this bill removed that restriction. There is now no age limit to contribute to a Traditional IRA.

Deduction of contributions to a Traditional IRA is subject to limitations according to your Modified Adjusted Gross Income (MAGI):

Income limits for IRA Deductions (2023)[3]
Tax filing status Covered by employer plan Not covered by employer plan
Deduction phase-out begins Deduction phase-out ends Deduction phase-out begins Deduction phase-out ends
Single Filer $73,000 $83,000 No limit No limit
Married Joint Filer (spouse covered by an employer plan) $116,000 $136,000 $218,000 $228,000
Married Joint Filer (spouse NOT covered by an employer plan) $116,000 $136,000 No limit No limit
Married Separate Filer (spouse covered by an employer plan) $0 $10,000 $0 $10,000
Married Separate Filer (spouse NOT covered by an employer plan) $0 $10,000 No limit No limit

If you fall inside the phase-out range, the deduction limit is scaled linearly form 100% to 0. For example, a single filer under age 50 with a MAGI of $80,000 would be able deduct up to $1,950 (=$6,500 * ($83,000 - $80,000) / ($83,000 - $73,000) ) of Traditional IRA contributions.

For the purposes of Traditional IRA contribution deductions, Modified Adjusted Gross Income is defined as Adjusted Gross Income with the following modifications:

Modified AGI
1.Subtract the following:
  • Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.
  • Minimum required distributions from IRAs (for conversions only).
2. Add the following deductions and exclusions:
  • Traditional IRA deduction,
  • Student loan interest deduction,
  • Tuition and fees deduction,
  • Domestic production activities deduction,
  • Foreign earned income exclusion,
  • Foreign housing exclusion or deduction,
  • Exclusion of qualified bond interest shown on Form 8815, and
  • Exclusion of employer-provided adoption benefits shown on Form 8839.[4]

Tracking of basis

Financial institutions that hold Traditional IRAs do not track the basis. When making a Traditional IRA contribution, you do not need to tell the financial institution whether the contribution is deductible or non-deductible. In fact, you do not need to decide whether you want contributions to be deductible until you file your taxes for that tax year.

The basis of your Traditional IRA is tracked on IRS Form 8606, which you are required to file with your federal income tax every year your basis changes. The basis of a Traditional IRA increases whenever you make non-deductible contributions. The basis decreases whenever you make a Traditional IRA withdrawal, or Roth conversion, when you have a non-zero basis.

You are not required to file a Form 8606 for years where your Traditional IRA basis doesn’t change, even if the basis is non-zero.

IRS Form 8606, tax year 2018

The "pro-rata" rule

Stated simply, the "pro-rata" rule means that withdrawals from a Traditional IRA are considered to a mix of pre-tax and after-tax funds, in proportion to the relative sizes of the two balances. The pro-rata rule has some unexpected details. The rule is applied to the combined balance of ALL Traditional IRAs, SEP-IRAs, and SIMPLE IRAs that an individual owns. For example, if you have a $10,000 Traditional IRA with a $10,000 basis (all non-deductible contributions) and a $90,000 SEP-IRA, a $10,000 withdrawal from the Traditional IRA, only 10% ($10,000 / ($10,000 + $90,000)) will be withdrawal of basis and 90% will be taxable. Even though the Traditional IRA has a balance of $0 and could even be closed, the remaining $9,000 of basis is effectively transferred to the SEP-IRA.

The pro-rata rule is applied based on the combined balance of all Traditional, SIMPLE, and SEP-IRAs as of December 31st of the year in which the withdrawal is made. This gives the taxpayer some flexibility, for example, to roll over a Traditional IRA into a 401k later in the year after making a Backdoor Roth IRA contribution.

A spouse’s IRA balances are not considered in the pro-rata calculation. Neither is an inherited Traditional IRA. If you have an inherited Traditional IRA with a non-zero basis, you will need to file a separate Form 8606 for withdrawals from that IRA. If you are the decedent's spouse, you have the option to combine the Traditional IRA with your own, in which case the basis and pre-tax balance would transfer to you, and you would continue to file a single Form 8606.

Exceptions to the “pro-rata” rule

There are two exceptions when funds withdrawn from a Traditional IRA are not subject to the pro-rata rule:

  • When a Traditional IRA is rolled into a 401(k) or other qualified plan, only the pre-tax portion is rolled over. The non-deductible basis remains within the IRA, which could subsequently be converted to a Roth IRA tax-free.
  • When making Qualified Charitable Distributions (QCDs) from a Traditional IRA, only the pre-tax portion is removed, keeping the basis intact.

Backdoor Roth IRA

The Backdoor Roth IRA is a process used to indirectly contribute to a Roth IRA for taxpayers whose Modified Adjusted Gross Income prevents them from contributing to a Roth IRA directly. There are two steps to a Backdoor Roth IRA:

  • Non-deductible contribution to a Traditional IRA
  • Conversion (usually, shortly thereafter) of the entire Traditional IRA to a Roth IRA

The net result of these two transactions is the same as a direct contribution to a Roth IRA. Neither of these two steps has any income limitations, and so taxpayers of any income can make Backdoor Roth IRA contributions. Aside from the complexity, there is no real disadvantage to using the Backdoor process. Due to the pro-rata rule, if you have any other Traditional IRAs, SEP-IRAs, or SIMPLE IRAs with pre-tax balances, the Backdoor Roth IRA will not work as intended, and will instead be mostly a conversion of pre-tax IRA balance. For those with an income high enough to need the Backdoor Roth IRA, this will result in a significant tax cost. See the main article for details.

Non-deductible traditional IRA

A "Non-deductible Traditional IRA" or "Nondeductible IRA" not a separate type of account, but rather results when non-deductible (not deducted) contributions are made to a Traditional IRA. Generally, the tax benefits of making non-deductible contributions to a Traditional IRA are inferior to either a Roth IRA, or deductible contributions to a Traditional IRA. Compared to a taxable account, a Non-deductible IRA has better performance for certain types of investments and worse performance for others, combined with low contribution limits and much less liquidity. Due to the availability of the Backdoor Roth IRA, situations where non-deductible contributions in a Traditional IRA make sense are limited. See the main article for a comparison to other types of accounts, and a performance analysis.

Rollovers and transfers

A significant amount of Traditional IRA assets and annual contributions come from the transfer or rollover of employer retirement plan assets. These transfer/rollovers occur when an employee severs employment from the employer whether voluntarily through job switching or retiring, or through lay-offs or firings. Employees may wish to transfer an employer plan to a Traditional IRA in order to consolidate accounts, reduce plan management expense, or to retain the right to transfer the transferred assets to another employer provided plan. Transfers of Traditional IRA accounts occur in three manners:

  • Direct Trustee-to-Trustee Transfers
  • Rollovers
  • Transfers incident to a divorce

IRA rollovers and transfers can become complicated. Refer to IRA Rollovers and Transfers for detailed consideration of this topic.

Required Minimum Distributions

Traditional IRAs have Required Minimum Distributions that generally begin the year the account holder reaches age 72. See the main page for a discussion of the details.

Inherited IRAs (Traditional and Roth) inherited prior to January 1, 2020 have Required Minimum Distributions calculated by IRS Publication 590-B Distribution Table I. Inherited IRAs inherited after January 1, 2020 have no RMDs, but must be emptied and closed within ten years of being inherited, unless certain exceptions apply.

Penalties for early withdrawals and excess contributions

Early withdrawals

Early withdrawals are generally amounts distributed from your traditional IRA account before you are age 59 1/2. You must pay a 10% additional tax on the distribution of any assets from your traditional IRA before you are age 59 1/2.

Exceptions to the penalty apply if the early withdrawal is:
  • made to a beneficiary or estate on account of the IRA owner's death,
  • made on account of disability,
  • made as part of a series of substantially equal periodic payments over your life or life expectancy,
  • made to pay for a qualified first–time home purchase,
  • not in excess of your qualified higher education expenses,
  • not in excess of certain medical insurance premiums paid while unemployed,
  • not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income, or
  • due to an IRS levy.

Excess contributions

Contributing more than the allowed amount in any year to your traditional IRA also subjects you to an additional tax. Any excess contribution not withdrawn by the date your tax return for the year is due (including extensions) is subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. Also, any earnings on the excess contribution must be withdrawn as well,[5] and are taxed as ordinary income.

See also


  1. "401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500". IRS. Retrieved 22 October 2022.
  2. "Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs)". Internal Revenue Service. "Who Can Open a Traditional IRA?" and Table 1-1. Retrieved February 19, 2022.
  3. "401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500". IRS. Retrieved 22 October 2022.
  4. IRS Publication 590: Roth IRAs
  5. "IRS Treasury Decision 9056: Earnings Calculation for Returned or Recharacterized IRA Contributions" (PDF). Internal Revenue Service (IRS). Retrieved May 19, 2023.

External links