Traditional IRAs let individuals contribute pre-tax dollars to a retirement investment account, which can grow tax deferred until retirement withdrawals occur (at age 59 ½ or later). In most cases, contributions to traditional IRAs are tax deductible. When the individual withdraws money from the account during retirement, those withdrawals are taxed at their ordinary income tax rate. The IRS restricts the amount that one may add to a traditional IRA each year, depending on age.
The contribution limit for the 2023 tax year is $6,500 for savers under 50 years of age. For people aged 50 and above, higher annual contribution limits apply via a catch-up contribution provision, allowing for an additional $1,000 (or a total of $7,500).
Account holders can take distributions as early as age 59 ½. Starting after age 72, account holders must take required minimum distributions (RMDs) from their traditional IRAs.
Funds removed before full retirement eligibility incur a 10% penalty (of the amount withdrawn) and taxes, at standard income tax rates. There are exceptions to these penalties for certain situations. For more information, see the IRS website on IRAs.