A Traditional IRA offers a clear and balanced approach to saving, providing potential tax advantages as you save for your retirement. Understanding the essentials of a Traditional IRA can help you make progress on your long-term financial goals. Read on to explore the potential benefits, drawbacks, and key details of a Traditional IRA for 2025.
Learning Points
What is an Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a tax-advantaged personal savings account generally used for setting money aside for retirement.
Depending on the type of IRA and your personal circumstances, these tax advantages can include tax-deductible contributions for traditional IRAs and tax-free withdrawals for Roth IRAs.
IRAs can sometimes feel familiar from afar – it’s all right there in the name “Individual Retirement Account” – and then, after a closer review, it can seem entirely foreign.
You’re likely familiar your 401(k) account, how your paycheck is used to contribute to your 401(k), and regularly receive communications about your 401(k) from your employer/plan sponsor. It can sometimes feel like there is more structure and educational resources built around your 401(k) experience than the average IRA.
Consider this. For most investors, IRAs generally complement, but do not fully replace employer-sponsored plans, like a 401(k) or a 403(b), for your retirement savings goals.
A Traditional IRA offers unique benefits and considerations for investors like you.
Let’s break down how Traditional IRAs work, provide some educational information, and make Traditional IRAs more approachable.
Traditional IRA: Key Details for 2025
Traditional IRAs are tax-deferred accounts. Meaning, your contributions to a traditional IRA are made with pre-tax dollars.
There are no income limitations for contributing to a traditional IRA.
Thus, when you invest money in your traditional IRA, you won’t pay taxes until you start distributing money from the account.
Any withdrawals/distributions are taxed at your ordinary income rates at the time of the distribution.
The chart on the left provides an illustrative example of how to think about the taxability of traditional IRA distributions.
Contribution Limitations
You can open and contribute to a Traditional IRA if you – or, if you file a joint return, your spouse – received taxable compensation during the year.
Your Traditional IRA contributions consist of pre-tax dollars – money you’ve not paid income tax on.
In 2025, you can contribute up to the following amounts to a Traditional IRA[i]:
- $7,000 per person.
- Up to $8,000 per person if you are age 50 or older.
There are no age limits on making regular contributions to traditional IRAs or Roth IRAs.
Keep in mind, IRA contribution limits are per taxpayer (not per account). If you have both a Roth IRA and a traditional IRA, you aggregate your contributions across both accounts up to the applicable limit.
Tax Deductibility
If you meet specific eligibility criteria, you can deduct your contributions from your taxable income, which can lower your tax bill.
If you are covered by a workplace retirement plan, like a 401(k), your modified adjusted gross income (MAGI) affects the amount of your deduction.
Specifically, the deductibility of your traditional IRA contributions is limited by the following income phase-outs in 2025:
- For single and head of household taxpayers, the modified AGI phase out is between $79,000 and $89,000.
- For married couples filing jointly, the modified AGI phase-out range is between $126,000 and $146,000.
If you are not covered by a workplace retirement plan, like a 401(k), but your spouse is, the deductibility of your traditional IRA contributions is limited by the following income phase-out in 2025[ii]:
- For married couples filing jointly, the modified AGI phase-out range is between $230,000 and $240,000.
Because topics like Traditional IRAs, like so many others in financial planning, intersect with the world of tax, make sure you coordinate with your qualified tax professional.
Withdrawals, Early Withdrawal Penalties, and Exceptions
Traditional IRA withdrawals during retirement are taxable.
The Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty if you withdraw funds from your Individual Retirement Account (IRA) before the age of 59½. However, there are exceptions to this rule.
If you believe one (or several) of these exceptions might be in your future, it’s good to be aware of them for your own planning. It can highlight the need for further research and planning.
Traditional IRA: Summary of Exceptions to the Early Withdrawal Penalty (2025)
- Age: After the participant/IRA owner reaches age 59½.
- Disability: If you become permanently and totally disabled, you can withdraw funds penalty-free from both Traditional and Roth IRAs.
- Medical Expenses: You can withdraw amounts up to your unreimbursed medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI) in a calendar year.
- First-Time Homebuyers: Qualified first-time homebuyers, up to $10,000 over taxpayer’s lifetime.
- Birth or Adoption: Distributions up to $5,000 per child for qualified birth or adoption expenses.
- Death: There is no penalty for the IRA beneficiaries to withdraw funds upon the original IRA owner’s death.
- Education: Qualified higher education expenses.
- Medical Health Insurance: Premiums paid while unemployed.
- Disaster Recovery: Distribution up to $22,000 to qualified individuals who sustain an economic loss due to a federally declared disaster where they live.
- Emergency Personal Expense: One distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or vested account balance over $1,000.
- IRS Levy: If the IRS levies your IRA to satisfy a tax debt, the withdrawal is not subject to the penalty.
- Domestic Abuse Victim: Distribution to a victim of domestic abuse by a spouse or domestic partner, up to the lesser of $10,300 or 50% of account.
- Emergency Personal Expense: One distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or vested account balance over $1,000.
- Military: Certain distributions to qualified military reservists called to active duty.
- Substantially Equal Periodic Payments (SEPP): Distributions based on your life expectancy (or the joint life expectancy of you and your beneficiary). This method has specific rules about how to calculate payments. Once started, these payments must continue for at least five years or until you reach age 59 ½, whichever is later.
This is a general list of exceptions, and the specifics of each exception vary.
The Next Step: It can be beneficial for you to consult with a qualified tax advisor if you believe these might apply to your specific situation.
Required Minimum Distributions (RMDs)
Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts, which include traditional IRAs, SIMPLE IRAs, and SEP IRAs, each year.
In 2025, you generally must start taking withdrawals from your traditional IRA when you reach age 73 on or after January 1, 2025. This date is called the required beginning date.
Specifically for 2025, you can take your first RMD by December 31, 2025, or delay it until April 1, 2026. In the scenario where you wait until April 1, 2026, for your first RMD, then you will have to take a second RMD by December 31, 2026.
While a traditional IRA owner must calculate the RMD separately for each IRA they own, they can withdraw the total amount from one or more of the IRAs.
Beneficiary Designations
We understand how hard it can be to think about what happens after you are gone.
If you would like your loved ones to benefit from your traditional IRA assets after your death, we’re here to help coordinate your wishes.
Beneficiary designations are a key element of your estate plan. Your beneficiary designations ensure your assets are passed along according to your wishes. It can be easy to overlook beneficiary designations on your accounts.
When you die, the assets you’ve carefully saved in your IRA go to those you’ve specified in each IRA’s beneficiary designation form.
Most folks tend to choose individuals as beneficiaries. Maybe they leave everything to their spouse or divide it equally among their children (i.e. per stirpes). Some even choose to leave their assets to charities, making one last act of kindness.
Alternatively, you can also name a trust as your IRA beneficiary.
There are rules investors like you can use to determine required minimum distributions (RMDs) for beneficiaries. These rules are governed by whether:
- The beneficiary is the surviving spouse.
- The beneficiary is an eligible designated beneficiary other than the surviving spouse.
- The beneficiary is an individual, other than an eligible designated beneficiary.
- The beneficiary isn’t an individual (e.g. the owner’s estate or trust).
- The IRA owner died either before the required beginning date, or died on or after the required beginning date.
The right IRA beneficiary can be different from one person to the next. You should carefully consider your choice in light of your of personal circumstances.
The Next Step: It’s important to review your account beneficiaries regularly, especially if key aspects of your personal or financial life have changed.
Investment Options
Like a workplace retirement account, a traditional IRA can provide you with investments that support your retirement or savings goals. IRA investment options are broader than a typical 401(k) plan.
With a Traditional IRA, you can select what you invest in, as well as how much and when you invest. Remember to stay within the contribution limits, though.
Mutual Funds, exchange traded funds (ETFs), and bonds are all potential investment options for traditional IRA owners.
IRAs cannot invest in life insurance or collectibles, such as art, antiques, gems, coins, or alcoholic beverages.
IRAs can invest in certain precious metals only if they meet specific requirements.
Since Traditional IRAs are tax-deferred accounts, long-term investors like you can factor in the tax efficiency of a specific investment. After-tax returns matter. Investors can look to minimize the effects of taxes on investment returns by placing different types of investments in tax-advantaged accounts or taxable accounts based on the tax treatment of the account and their personal circumstances.
Generally speaking – and quite a bit of ink has been spilled on this topic – long-term investors will seek to hold taxable bonds and taxable bond funds in a traditional IRA. Asset location is a broader lens that you can apply to all your investment accounts. It’s something that needs to be personalized to fit your specific facts and circumstances.
Asset location is a broader lens that you can apply to all your investment accounts. It’s something that needs to be personalized to fit your specific facts and circumstances.
The Next Step
Hopefully you found this overview of the Traditional IRA details for 2025 helpful and educational. What works well for one person might not be the perfect fit for another.
When evaluating what type(s) of IRAs best align with your goals, you’ll want to fully incorporate all the moving parts of your financial life into your decision.
Taking a Strategic View of Your Finances
Are you on track for your short-term goals, like making memories with your family by going on vacations together? How confidently are you approaching saving and investing for your long-term aspirations, like retiring or pursuing a meaningful second career?
We help busy parents and individual professionals like you develop financial plans to address questions like:
- How can we save for a fulfilling retirement beyond our 401(k) plans?
- What does it take to save for the kids’ education and make a lifetime of memories along the way?
- These causes are close to our hearts – what are our options to give even more meaningful support?
As your financial planner in Saint Louis, we can help you get organized and start feeling more confident that you are making progress towards your savings priorities.
Working with your financial planner can provide you with the right mix of accountability, collaboration, and long-term thinking.
When you know who and what are truly important, we can help you create incredible clarity about your spending and savings priorities. Clarity to confidently save for and spend on what matters.
If you’re ready to take the next step together, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.
[i] IRS, “IRM PROCEDURAL UPDATE,” November 13, 2024, https://www.irs.gov/pub/foia/ig/spder/ts-21-1124-1129.pdf.
[i] Table 1-3. Effect of Modified AGI on Deduction if You Aren’t Covered by a Retirement Plan at Work. https://www.irs.gov/publications/p590a#en_US_2024_publink1000230476:~:text=Single%E2%80%9D%20filing%20status).-,Table%201%2D3,-.%20Effect%20of