I-R-A. Just three little letters, but they can have a big impact on your retirement savings — and your taxes. Let’s break down what a traditional IRA (individual retirement account) really is, how it works, and how you can use an IRA to your advantage during tax time and beyond.
What is a traditional IRA?
A traditional IRA is a type of retirement savings account you can open through a bank, brokerage, or financial advisor. It’s designed to encourage retirement savings with some nice perks from the IRS — mainly, potential tax deductions and tax-deferred growth.
Here’s how this type of IRA works:
- IRAs offer many different investment options for your contributions, like mutual funds, stocks, bonds, and annuities.
- You make contributions using pre-tax dollars, meaning you may be able to deduct those contributions from your taxable income (more on that below).
- Your investments grow tax-deferred — you won’t pay taxes on earnings until you withdraw the money in retirement.
- You’ll pay ordinary income tax when you withdraw funds during retirement.
- You must begin taking required minimum distributions (RMDs) starting at age 73 (or age 72 if you were born before July 1, 1949).
- A 10% early withdrawal penalty applies if you take distributions before age 59 ½ .
You can contribute to a traditional IRA even if you’re self-employed or your employer doesn’t offer a retirement plan like a 401(k). And while retirement might feel far off, the sooner you start saving, the more time your money has to grow!
2025 IRA contribution limits
The IRS sets yearly limits on how much you can contribute across all your IRAs combined. For both tax years 2024 and 2025, the contribution limits are:
- Up to $7,000 if you’re under age 50
- Up to $8,000 if you’re 50 or older (this includes a catch-up contribution)
There are no income limits to contribute to a traditional individual retirement account. You just need to have earned income, like wages or self-employment income. Investment income (like interest or dividends) doesn’t count.
IRA contribution tax benefits: Tax deductions with an IRA
Does contributing to an IRA reduce your taxes?
Yes! If you meet certain criteria, your traditional IRA contributions may be fully or partially tax-deductible. This is one of the biggest draws of a traditional IRA.
Whether or not you can deduct your IRA contributions depends on two eligibility factors:
- Your modified adjusted gross income (MAGI)
- Whether you (or your spouse) are covered by a retirement plan at work
What is an IRA tax deduction?
An IRA tax deduction allows you to subtract all or part of your traditional IRA contribution from your taxable income for the year. This reduces how much income is subject to tax, which can lower your overall tax bill. In some cases, contributing to an individual retirement account might even drop you into a lower tax rate or qualify you for other tax credits.
How much does an IRA contribution reduce taxes?
The amount of your deduction depends on your income, filing status, and whether you or your spouse have a retirement plan at work. The higher your income and the more you contribute (up to the limit), the bigger your potential savings.
Deduction limits for traditional IRA contributions in 2025
Here’s how your income and filing status impact whether you can deduct your traditional IRA contributions in 2025:
| Filing status | Deduction if MAGI is… |
|---|---|
| Single or head of household (covered by work retirement plan) | $79,000 or less: Full deduction |
| $79,001 to $88,999: Partial deduction | |
| $89,000 or more: Nondeductible | |
| Married filing jointly (both covered by work retirement plan) | $126,000 or less: Full deduction |
| $126,001 to $145,999: Partial deduction | |
| $146,000 or more: Nondeductible | |
| Married filing jointly (only one spouse covered by work retirement plan) | $236,000 or less: Full deduction |
| $236,001 to $245,999: Partial deduction | |
| $246,000 or more: Nondeductible | |
| Married filing separately (either you or your spouse covered by work retirement plan) | Less than $10,000: Partial deduction |
| $10,000 or more: Nondeductible |
If you don’t have access to a workplace plan (and your spouse doesn’t either), your traditional IRA contribution is fully deductible no matter your income.
How and when are traditional IRAs taxed?
Here’s how and when taxes come into play with a traditional IRA:
- When you contribute: You may get a tax deduction up front.
- While the money grows: You don’t pay any tax — this is called tax-deferred growth.
- When you withdraw in retirement: You’ll pay ordinary income tax on the full amount you withdraw — both contributions and earnings.
Withdraw early (before age 59 ½), and you’ll generally owe a 10% penalty on top of income tax unless you qualify for an exception (like certain medical or education costs).
Traditional IRA tax benefits
There are a few tax benefits of IRA contributions to keep in mind:
- Contributions may be tax-deductible, reducing your taxable income for the year.
- If you are right on the edge between two tax brackets, contributing to a traditional IRA could push you into a lower tax bracket or help you qualify for other tax credits (like the Earned Income Tax Credit).
- You defer paying income tax on your investment earnings until retirement.
Example
Say your income is $60,000 as a single filer, and you contribute $6,000 to a traditional IRA in 2025. Since your income is lower than the MAGI limit, you can take a tax deduction for your entire contribution amount. Your taxable income drops to $54,000, saving you money in taxes.
How do I report traditional IRA distributions on my tax return?
When you start taking money out of your traditional IRA, those distributions generally count as taxable income. You’ll likely receive Form 1099-R from your IRA provider, which shows how much you withdrew and how much (if any) tax was withheld from your IRA distributions. You’ll then use the information on your Form 1099-R to report IRA distributions on your tax return.
Don’t worry — TaxAct® makes this part easy. Our step-by-step interview process will guide you through entering your 1099-R information correctly on your return. For more help, check out our article on Form 1099-R and how to report IRA distributions using our tax software.
Traditional IRA FAQs
The bottom line
Traditional IRAs are a double win for some taxpayers: You save for retirement, and you may lower your taxable income right now. Between tax deductions, tax-deferred growth, and flexible contribution options, the tax advantages of a traditional IRA are worth exploring if you’re looking to boost your retirement nest egg — especially if you don’t have a retirement plan at work or want more control over your investments.
Need help figuring out your IRA deduction? Our tax preparation software will guide you through the filing process step by step and help you claim any tax deductions you’re eligible for.
