top of page
  • Writer's pictureRealFacts Editorial Team

Strategic Advantages of a Traditional IRA

Roth IRA written out

A Traditional IRA (Individual Retirement Account) is a widely used retirement savings option in the United States that offers several benefits. Contributions to a Traditional IRA are often tax-deductible, meaning that the money you put in can reduce your taxable income for the year, potentially lowering your tax bill. The investment grows tax-deferred, which means you do not pay taxes on the earnings until you withdraw the money in retirement. This tax-deferred growth can be highly beneficial because the money that would have gone to taxes can instead be reinvested and compounded resulting in a larger nest egg over time.

Investors should consider putting money into a Traditional IRA if they expect to be in a lower tax bracket during retirement than they are currently. This way, they can benefit from the initial tax deduction at a higher rate and pay taxes at a lower rate when they withdraw the funds in retirement. Additionally, if an individual does not have access to an employer-sponsored retirement plan, a Traditional IRA can serve as a primary retirement savings vehicle. Even those with access to a 401(k) or similar plan might find a Traditional IRA beneficial for diversifying their tax strategy and maximizing their retirement savings. 

Investors Business Daily author, Adam Shell, wrote, “If you're unhappy with your 401(k), save enough to get the match. Then fund either a traditional IRA or a Roth IRA, so you can benefit from any tax deductions from the regular IRA and the tax-free withdrawals of a Roth IRA.” Shell's advice illustrates how various retirement accounts can be utilized to maximize potential future capital for retirement. Another scenario where a Traditional IRA is advantageous is when individuals receive a windfall or unexpected income. By contributing this income to a Traditional IRA, they can potentially reduce their taxable income for that year while setting aside more money for retirement. The annual contribution limit for a Traditional IRA is $6,500 for individuals under 50 and $7,500 for those 50 and older (as of 2024). 

One of the key features of a Traditional IRA is the age at which you can begin taking distributions. You can start withdrawing funds penalty-free at age 59½. However, unlike Roth IRAs, Traditional IRAs require you to start taking minimum distributions, known as Required Minimum Distributions (RMDs), starting at age 73 (previously 72). The amount of the RMD is calculated based on your life expectancy and account balance, and failing to take the RMD can result in hefty penalties. These mandatory withdrawals ensure that the government eventually collects taxes on the deferred income. This aspect could be viewed negatively by investors, depending on their goals and retirement plans. Overall, a Traditional IRA provides a flexible, tax-advantaged way to save for retirement, making it a valuable component of a well-rounded retirement strategy.


bottom of page