What is a Traditional IRA and how does it work?

This article is for informational purposes only and does not constitute tax, legal or financial advice. Tax rules and retirement account regulations can vary by individual circumstance. You should consult a qualified tax or financial professional before making any retirement or investment decisions.

What is a Traditional IRA?

A Traditional IRA is a ‘tax-deferred’ retirement savings account that’s designed to help you set money aside for the future while encouraging long-term investing. When you contribute to this account, you can invest that money in assets such as stocks, bonds, ETFs, etc. The account is meant to grow over time, usually over decades.

What makes a Traditional IRA different from a regular brokerage account is that it offers special tax advantages under US law. In many cases, contributions can reduce your taxable income today, while taxes are paid later when you withdraw funds in retirement. 

Traditional IRAs are often widely used because they’re accessible and flexible. You don’t need an employer to open one and you can choose from many different providers, including banks and brokerages.

Traditional IRA vs. Roth IRA in a nutshell

Both Traditional and Roth IRAs help individuals save for retirement, but they differ mainly in when taxes apply. A Traditional IRA often provides a tax benefit today (you don’t pay annual taxes on dividends or gains), while a Roth IRA may provide tax-free withdrawals later.

Choosing between them depends on factors like income, tax expectations and retirement goals.

Read our beginner’s guide to Roth IRAs

Pre-tax vs. post-tax contributions

Traditional IRAs are often associated with pre-tax contributions because these contributions may be deductible. If they are deductible, you may get a tax break now, and only pay taxes later when you withdraw the money. That means you may pay less in taxes today while saving for the future.

However, not everyone qualifies for the deduction. Deductibility depends on your income and whether you or your spouse has access to a workplace retirement plan. More on this later.

Roth IRAs, as mentioned, use post-tax contributions. You pay taxes upfront, but qualified withdrawals may be tax-free later.

Who can open a Traditional IRA?

Most people with earned income can open and contribute to a Traditional IRA. Earned income generally includes wages, salaries, tips or self-employment income.

There’s no upper income limit that prevents you from contributing, which makes Traditional IRAs broadly available even to higher earners. There is also no age cutoff, as long as you still have earned income. 

Learn more about Traditional IRAs vs. Roth IRAs

The Crypto.com Stocks IRA 

The Crypto.com Stocks IRA is a tax-advantaged retirement account that lets eligible US users invest in stocks and ETFs directly through the Crypto.com App. You can choose either a Traditional IRA or a Roth IRA structure, depending on your tax goals. 

Both account types follow standard IRS rules for contributions, withdrawals, and eligibility. This means you can make new contributions, roll over funds from an old 401(k) or transfer an existing IRA into the Crypto.com Stocks platform.

You can invest in thousands of US equities and ETFs, with features like commission-free trading and fractional shares supported inside the IRA. The account is integrated with Crypto.com’s Stocks feature, so you can manage retirement and non-retirement investments side by side in one app. 

As with any retirement account, IRA regulations apply.

Open a Crypto.com Stocks IRA account 

How a Traditional IRA works

A Traditional IRA is built around long-term retirement investing. The idea is that you contribute money during your working years, allow it to grow over time and then withdraw it later when you need income in retirement.

The process usually follows four steps:

1. You contribute money to the IRA.
2. You invest that money in eligible assets.
3. Investments grow tax-deferred over time.
4. You withdraw funds in retirement, typically paying taxes then.

Funding your Traditional IRA account

Traditional IRAs can be funded in a few different ways. The most common method is making annual contributions from earned income. However, you can also move retirement savings from other accounts.

Common funding methods include:

• Direct yearly contributions.
• Transfers from another IRA.
• Rollovers from workplace plans like a 401(k).

How contributions can reduce taxable income

Let’s look at a hypothetical example of how your Traditional IRA contributions can reduce taxable income. Imagine you earn $60,000 this year and contribute $4,000 to your IRA. If your contribution is deductible, your taxable income may fall to $56,000.

Tax-deferred growth explained

Inside a Traditional IRA, investments can grow tax-deferred. This means you typically do not pay yearly taxes on the following:

• Capital gains from selling investments.
• Dividends earned from stocks or funds.
• Interest income from bonds or certificates of deposit (CDs).

Tax deferral can help long-term compounding, because more of your returns stay invested rather than being reduced by annual taxes. In practice, this could make a meaningful difference over decades of retirement saving.

Withdrawals in retirement

When you take money out of a Traditional IRA, withdrawals are generally taxed as ordinary income. This is because the account is structured around paying taxes later rather than upfront.

The amount of tax you pay depends on your income level and tax bracket when you withdraw.

Many retirees withdraw gradually over time – instead of all at once – using IRA distributions as part of their overall retirement income plan.

Traditional IRA contribution limits and rules

The IRS sets annual contribution limits for IRAs. These limits exist to encourage retirement saving while keeping the system structured and consistent. IRA contribution limits are subject to IRS final release and may adjust slightly for inflation.

For 2026, the IRA contribution limit is $7,500 for individuals under the age of 50 and $8,600 for those 50 or older (including a $1,100 catch-up contribution).

Contribution limits apply across all IRA accounts combined – this is a common misunderstanding for first-time savers. It means you can’t contribute the maximum separately to both a Traditional IRA and Roth IRA. The yearly cap applies to the total across accounts.

The goal of contribution limits is to provide meaningful tax advantages for individuals saving for retirement, while preventing retirement accounts from being used as unlimited tax shelters. Limits also help standardize retirement saving opportunities across income levels.

Catch-up contributions for age 50+

If you are age 50 or older, the IRS allows an additional catch-up contribution. Catch-up rules are meant to help people increase IRA savings as they get closer to retirement, especially if they started contributing later or want to accelerate contributions in the years ahead.

Example contribution scenarios

Always confirm the latest limits through IRS guidance or a qualified provider.

Contribution deadlines and rules

Traditional IRA contributions follow specific IRS timing rules. In most cases:

• Contributions for a tax year can be made until Tax Day of the following year.
• You must have earned income to contribute (unless it’s a joint filing).
• Joint filers may contribute through a spousal IRA, even if one spouse doesn’t work.

Traditional IRA tax treatment explained

A Traditional IRA is usually taxed in three phases:

1. Contributions
2. Investment growth
3. Withdrawals

Understanding each phase helps clarify where the advantages – and obligations – come from.

Contributions and deduction rules

Traditional IRA contributions may be deductible, but deductibility depends on context. Key factors include your income level, your tax filing status and whether you or your spouse participates in a workplace retirement plan.

For example, someone without a 401(k) at work may be more likely to deduct their IRA contributions. Someone with a workplace plan may face income-based phase-outs where deductions shrink or disappear at higher income levels.

Because deduction rules are conditional, it’s important not to assume all Traditional IRA contributions automatically reduce taxable income.

Taxation of withdrawals

Withdrawals from a Traditional IRA are generally taxed as ordinary income. This includes both contributions that were deducted and earnings that accumulated through investment growth.

Unlike long-term capital gains, IRA withdrawals don’t receive special tax rates.

What is a nondeductible Traditional IRA contribution?

A nondeductible contribution occurs when you contribute to a Traditional IRA but can’t take the tax deduction. This means:

• You contribute after-tax dollars.
• Your taxable income doesn’t decrease.
• You must track your basis to avoid double taxation later.

The IRS requires this tracking through Form 8606. Good recordkeeping becomes essential in this scenario.

Required Minimum Distributions (RMDs)

Traditional IRAs are subject to RMD – mandatory withdrawals that begin once you reach a certain age under current IRS rules. They exist because the government wants tax-deferred retirement savings to eventually be taxed. 

Roth IRAs don’t require RMDs during the original owner’s lifetime.

How RMDs are calculated

RMD amounts are based on your IRA account balance and IRS life expectancy tables. Each year, the IRS provides a distribution factor and your required withdrawal is calculated using that formula.

Penalties for missing an RMD

If you fail to take an RMD on time, the IRS may apply significant penalties. Because these withdrawals are mandatory, many retirees begin planning distributions in advance to avoid surprises. That could mean reviewing account balances, withdrawal timelines and tax implications once RMD age approaches.

Example of an RMD calculation

Let’s say you have $200,000 in your Traditional IRA and your distribution factor is 25. The calculation would be: $200,000 ÷ 25 = $8,000. This amount would generally be taxable income.

Traditional IRA withdrawal rules

Traditional IRA withdrawals are generally intended for retirement use. The key milestone is age 59 ½. After that age, withdrawals are allowed without the 10% early withdrawal penalty and distributions are still typically taxed as ordinary income.

Roth IRA qualified withdrawals may be tax-free, assuming the account meets holding period and age requirements.

Traditional IRA early withdrawal penalties and exceptions

Early withdrawals from your Traditional IRA typically trigger ordinary income tax and a 10% additional IRS penalty. This penalty exists to discourage using retirement savings for short-term spending.

However, the IRS does allow certain limited exceptions in specific circumstances:

• First-time home purchase (up to IRS limits).
• Qualified higher education expenses.
• Birth or adoption costs.
• Health insurance premiums during unemployment.
• Permanent disability.

Even when an exception applies, taxes may still be owed, so it’s important to understand the rules before withdrawing early.

What can you invest in with a Traditional IRA?

A Traditional IRA is not an investment itself – it’s an account that can hold investments. Most IRA providers allow assets such as:

• Stocks
• Bonds
• ETFs
• Mutual funds
• Certificates of deposit
• US Treasuries

The specific investment menu depends on the custodian. For example, a bank IRA may offer fewer choices than a brokerage IRA.

More ways to invest in the US

Investment restrictions

The IRS prohibits certain investments in IRAs, including:

• Collectibles (like art or rare coins)
• Life insurance contracts

Diversification inside an IRA

Diversification refers to holding a mix of different investments, such as stocks, bonds or funds, rather than concentrating your entire account in a single asset. The idea is that different assets may perform differently over time. 

Diversification doesn’t guarantee profits or prevent losses, but it’s commonly discussed as a way to manage risk and possibly reduce the impact of volatility over time.

Investment options available for diversification can also vary by provider. For example, a bank IRA may offer CDs or fixed products, while a brokerage IRA may provide access to a wider range of market-based investments.

Traditional IRA vs. Roth IRA: Key differences

Your guide to Traditional IRAs vs. Roth IRAs

Traditional IRA vs. 401(k)

Many beginners also ask how a Traditional IRA compares to a 401(k). In short, a Traditional IRA is individually opened and may provide more provider flexibility, but contribution limits are lower. A 401(k) is an employer-sponsored retirement plan, often with higher contribution limits. Some employers also offer matching contributions.

In many cases, people have both: A 401(k) for employer match and higher limits, as well as a Traditional IRA for additional retirement savings flexibility.

How to open a Traditional IRA

Opening a Traditional IRA is usually straightforward through a bank, brokerage or retirement provider. Most providers require your basic personal information and your funding source (own contribution, rollover or transfer).

Here’s the general flow of opening a Traditional IRA:

1. Choose an IRA provider.
2. Open an account online or with an advisor.
3. Fund the account through contribution, rollover or transfer.
4. Select investments inside the IRA.
5. Track contributions and withdrawal rules each year.

Choosing the right IRA provider

Some factors people commonly consider include:

• Fees and account minimums: Some providers charge annual maintenance fees, trading fees or require a minimum balance to open an account.
• Investment options available: IRA providers may offer different ranges of investments. For example, a bank may focus on fixed products, while a brokerage may provide access to multiple asset classes.
• Ease of use and platform experience: Many people prefer a provider with a clear interface, accessible account tools and straightforward reporting, especially if they’re managing retirement savings over many years.
• Long-term flexibility for rollovers or transfers: Retirement accounts often change as careers change. Some providers make it easier to roll over funds from a 401(k) or transfer an IRA between institutions.
• Support and educational tools: Some platforms offer retirement education, customer support and planning resources that can help investors better understand contributions, withdrawals and tax rules.

Learn how to choose an IRA provider

FAQs about Traditional IRAs

What is a Traditional IRA in simple terms?

A Traditional IRA is a retirement account that may let you deduct contributions today while investments grow tax-deferred. You generally pay taxes when you withdraw funds in retirement.

Is a Traditional IRA pre-tax?

A Traditional IRA is often described as a ‘pre-tax’ retirement account, but that’s only true in some cases. Contributions are only considered pre-tax if they’re tax-deductible – and whether they’re deductible depends on your income, tax filing status and whether you (or your spouse) are covered by a workplace retirement plan. 

How does a Traditional IRA reduce my taxes?

If your contribution is deductible, it lowers your taxable income for the year, which may reduce your current tax bill.

When do I pay taxes on a Traditional IRA?

You typically pay taxes when you withdraw funds. Withdrawals are usually taxed as ordinary income in retirement.

What investments can I hold in a Traditional IRA?

Most IRAs allow investments like stocks, ETFs, bonds, mutual funds, CDs and treasuries, depending on the provider.

What is the main difference between a Traditional IRA and a Roth IRA?

Traditional IRAs may offer tax advantages now, with taxes later. Roth IRAs involve taxes now, with potentially tax-free withdrawals later.

When do RMDs start for a Traditional IRA?

RMDs start at the required age under current IRS rules. They’re mandatory withdrawals designed to ensure deferred income is eventually taxed.

Can I lose money in a Traditional IRA?

Yes, a Traditional IRA can hold investments that rise or fall in value, so losses are possible. Tax benefits do not eliminate market risk.

What happens if I take money out of my Traditional IRA early?

Withdrawals before age 59½ may trigger income taxes and a 10% early withdrawal penalty unless an IRS exception applies.

This is informational content sponsored by Crypto.com and should not be considered as investment advice.

Foris Capital US LLC (“FCUL” or referred to herein as “Crypto.com Stocks”) is a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a Member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). For further information about FCUL, please visit FINRA BrokerCheck.
FCUL is a subsidiary of Crypto.com. 

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Crypto.com IRA services are offered to eligible U.S. users only. Eligible customers can open a Traditional IRA or Roth IRA with Foris Capital US, which supports stocks and cash, and a separate Traditional IRA or Roth IRA with Foris DAX Trust Company, LLC, which supports digital assets only. All services and features related to digital assets apply to the IRA provided by Foris DAX Trust Company, LLC, not by Foris Capital US, LLC. IRA features are subject to regulatory requirements and availability. All accounts are subject to eligibility requirements, and applicable terms and conditions. Users should consult with independent tax and financial advisors regarding their individual situation.

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