How a Traditional IRA Works: the Deduction, Withdrawals and Traditional vs Roth

A traditional IRA is a retirement account you open yourself, at the broker of your choice. The payment can be deductible, so your tax bill can go down this year. Inside the account, nothing is taxed while the money stays in. You pay the tax later, when you take the money out. This guide explains how the account works, who can deduct, the rules for getting money out, rollovers from a 401(k), and how to choose between traditional and Roth. All figures are for 2026.

How a traditional IRA works

You open the account at a broker (Fidelity, Schwab, Vanguard or any other). You pay in from your bank account, then you choose the investments. There is no plan menu: a traditional IRA can hold almost anything your broker lists, such as stocks, ETFs, index funds, bonds and cash. It cannot hold life insurance or collectibles (art, antiques, gems, most coins), with a carve-out for certain bullion held by the trustee.

Tax deferred, not tax-free

The traditional deal has two sides.

• On the way in. The payment can be deductible. If you are in the 22% bracket, a $7,500 deductible payment cuts your federal tax by $1,650 this year.
• On the way out. Everything you take out is ordinary income, taxed at your bracket in the year of the withdrawal: the contributions and the growth together. A dividend or a long-term gain earned inside the account does not keep its lower rate.

The tax is deferred, not removed. The deal pays when your tax rate in retirement is lower than your rate today, which is often the case for people at the peak of their career.

What happens inside the account

While the money stays in the account, nothing is taxed: no tax on dividends, no tax on gains when you sell, no difference between short-term and long-term. You can rebalance as often as you want at no tax cost.

One cost the account cannot remove: tax that a foreign country withholds on its dividends. An IRA pays no US tax on that income, so it has nothing to set a foreign tax credit against, and that withholding is lost for good. Canada is the exception, because the US-Canada tax treaty exempts IRAs from Canadian withholding on dividends. Read more in what is dividend withholding tax.

The 2026 limits

The limit is per person, not per account. Your traditional IRAs and your Roth IRAs share one limit. You can also not pay in more than your taxable pay for the year. A spouse with no pay can still have an IRA on the income of the other spouse (a spousal IRA), if you file jointly. There is no age limit on paying in: the old cut-off at 70½ ended in 2020.

You can make a 2026 contribution until the tax filing date in April 2027. Tell your broker which year the payment is for. The figures come from the IRS announcement for 2026 and the IRS table of limits by year.

Who can deduct

Anyone with taxable pay can pay into a traditional IRA, at any income. The deduction is a different question. It depends on two things: whether a workplace plan (such as a 401(k)) covers you, and your modified adjusted gross income (MAGI).

• No workplace plan for you or your spouse. The payment is fully deductible, at any income.
• A workplace plan covers you. The deduction goes down, then stops, inside these ranges:

IRS Publication 590-A has the worksheet.

If you cannot deduct, you can still make a nondeductible payment. The growth is still deferred, and the money you paid in comes back tax-free later, because it was already taxed. Report it on Form 8606 every year, or you may pay tax on the same dollars twice. A nondeductible payment is also the first step of the backdoor Roth.

Getting money out

The 10% before age 59½

From age 59½, you can take money out at any time. It is ordinary income, but there is no penalty. Before 59½, a withdrawal also has a 10% additional tax, unless an exception applies. The IRA exceptions are not the same as the 401(k) ones. An IRA adds some:

• up to $10,000 (a lifetime limit) for your first home;
• qualified higher-education costs;
• health insurance premiums while you are unemployed.

Other exceptions include disability, medical costs above 7.5% of your income, a series of equal payments over your life expectancy, and the birth or adoption of a child (up to $5,000). An IRA does not have the 401(k) exception for people who leave their job at 55 or older. The full list is in IRS Topic 557.

Required minimum distributions

The tax deferral does not last forever. From age 73, you must take a minimum amount out every year: the required minimum distribution (RMD). The first one is due by April 1 of the year after you turn 73, and each later one by December 31. The amount is your balance at the end of the previous year, divided by a life-expectancy factor from the IRS tables. Under current law, the age rises to 75 for people born in 1960 or later.

If you miss an RMD, the shortfall has a 25% tax, or 10% if you correct it within two years. The rules are on the IRS page on required minimum distributions and in IRS Publication 590-B.

An heir who inherits your IRA must usually empty it within ten years. A spouse can treat it as their own.

Rolling a 401(k) into an IRA

When you leave a job, you can move your old 401(k) into a traditional IRA. People do it to get a wider choice of investments, lower fees, or one account in place of several old plans.

• Ask for a direct rollover. The plan sends the money straight to your IRA. No tax is withheld and nothing is taxed.
• Avoid the indirect route. If the plan pays you, it withholds 20% for tax. You then have 60 days to put the full amount into an IRA, including the 20% from your own pocket, or the missing part is taxed as a withdrawal.
• One indirect IRA-to-IRA rollover per 12 months. This limit counts all your IRAs together. A direct transfer between two IRA providers does not count, and you can make as many as you want.

Before you roll over, think about the backdoor Roth. Pre-tax money in a traditional IRA makes a later backdoor conversion partly taxable, under the pro-rata rule. Money left in a 401(k) does not count. Read how a 401(k) works for the plan side.

Traditional or Roth?

Both accounts share one limit, so each dollar you pay in is a choice between the two.

The traditional IRA usually wins when:

• your tax rate today is high and you expect a lower one in retirement;
• you want to lower your income this year, for example to qualify for a credit.

The Roth IRA usually wins when:

• your tax rate today is low, early in your career;
• you expect decades of growth, or a higher tax rate later;
• you want no minimum distributions and a tax-free account for your heirs.

If you cannot tell, many people split their savings between the two. Your future tax rate is a guess, and money on both sides gives you a choice later. Read how a Roth IRA works for the five-year rule and the backdoor.

Track your traditional IRA with the rest of your portfolio in Cadances

A traditional IRA is usually one account among several: a 401(k) at work, a Roth IRA, maybe a rollover IRA from an old job, a taxable brokerage account. Cadances is a portfolio tracker: it puts all of them in one place and gives you one total, one allocation and one performance figure.

• An account type priced the way the law prices it. On the Portfolios screen, the traditional IRA is its own account type, next to the Roth IRA, the SEP and SIMPLE IRAs, the 401(k) and your taxable accounts. Dividends and gains inside it show as untaxed, so your income forecast is not cut by a tax you do not pay yet.
• The tax bill you are deferring, made visible. For US residents, the Tax screen shows the 2026 limit with the catch-up your age unlocks, reminds you that the limit is shared with your Roth IRAs, shows the age when the money becomes reachable without the 10%, and prices what a full withdrawal today would cost at your ordinary bracket. Past 73 it reminds you of the minimum distribution.
• Old plans and rollovers in one place. Import the export file from your broker or plan provider, or add your holdings by hand. A rollover IRA can be its own portfolio, so you can follow it after the move.
• Performance and allocation. On Performance, compare your IRA with the S&P 500, or with your 401(k), over the window you pick. Set allocation rules on each portfolio (for example, bonds at least 20%) and see when your mix drifts away from your target.

Two limits to keep in mind: Cadances does not know your income or your workplace plan, so it cannot tell you if your payment is deductible. And it prices a withdrawal as if every payment was deducted, which is the common case and the higher figure. If you made nondeductible payments, your Form 8606 holds the basis that comes back tax-free.

Start free. Create your Cadances account: no card, no time limit. The Free plan holds one portfolio of up to 15 holdings, which is enough for one IRA. To track your IRAs, your 401(k) and your taxable account side by side, compare the paid plans.

The bottom line

• A traditional IRA can cut your tax bill today, and the money grows untaxed until you take it out.
• In 2026 you can pay in $7,500, or $8,600 from age 50, shared with your Roth IRAs.
• If a workplace plan covers you, check the income ranges before you count on the deduction.
• Withdrawals are ordinary income, with a 10% additional tax before 59½ unless an exception applies.
• Minimum distributions start at 73.
• Roll an old 401(k) over directly, and think about the backdoor Roth first.

Each monthly payment is dollar-cost averaging by design, and a diversified mix inside the account matters as much as the amount you put in.

This article is general information, not tax or legal advice. Your own situation decides which rules apply to you.