A Regular IRA Lets You Save for Retirement With Tax Advantages

A regular IRA (also called a traditional IRA) is a retirement savings account where you put money aside and it grows tax-deferred until you withdraw it in retirement. The main advantage is that contributions you make may reduce your taxable income in the year you make them, and you do not pay taxes on the growth inside the account—only when you take the money out later.

The trade-off is that the IRS sets rules about when you can withdraw without penalty, how much you can contribute each year, and whether your contributions are actually tax-deductible (that depends on your income and whether you have a workplace retirement plan). It is a straightforward account structure, but the tax rules around it matter, so understanding them before you open one saves confusion later.

Key Takeaways

  • Contributions to a regular IRA may reduce your taxable income in the year you make them, though this depends on your income and access to a workplace plan.
  • Money inside the account grows without being taxed each year, but you pay income tax on withdrawals in retirement.
  • You cannot withdraw money before age 59½ without paying a 10 percent penalty, with limited exceptions for hardship.
  • The IRS sets an annual contribution limit (which changes yearly) and requires you to start taking withdrawals at age 73.
  • You can open a regular IRA at a bank, brokerage, or credit union and choose how to invest the money inside it.

How Contributions and Tax Deductions Work

When you contribute money to a regular IRA, you may be able to deduct that amount from your taxable income on your federal tax return. If you earn $50,000 and contribute $5,000 to a regular IRA, you might report only $45,000 as taxable income that year. This deduction lowers the taxes you owe.

However, the deduction is not automatic for everyone. If you or your spouse have access to a workplace retirement plan (like a 401(k) or 403(b)), the IRS phases out your deduction once your income reaches a certain level. Those income thresholds change each year. If you have no workplace plan, you can deduct the full amount you contribute, no matter your income.

You can contribute up to a set dollar amount each year—the IRS changes this limit annually, and it is higher if you are 50 or older. For the most current limit, check the IRS website or your bank's IRA materials, since the number shifts year to year.

How Money Grows Tax-Free Inside the Account

Once your money is in the IRA, any interest, dividends, or investment gains do not trigger a tax bill each year. If you own a stock that doubles in value, or a bond that pays interest, you do not report that gain on your tax return that year. This is called tax-deferred growth—the taxes are deferred, not erased.

This matters because it means more of your money stays invested and compounds over time. In a regular taxable savings account, you would owe taxes on interest or gains each year, which reduces the amount available to reinvest. In an IRA, that tax bill waits until you withdraw.

When You Can Withdraw Money and What Happens If You Do Not Wait

The IRS wants you to save this money for retirement, so it penalizes early withdrawals. If you take money out before age 59½, you typically owe a 10 percent early withdrawal penalty on top of regular income tax on the amount you withdraw. A $10,000 withdrawal at age 45 would cost you $1,000 in penalty plus income tax on the full $10,000.

There are a few exceptions where you can withdraw without the 10 percent penalty: if you become disabled, face a medical hardship, are a first-time homebuyer (up to $10,000 lifetime), or meet a few other narrow circumstances. Even with an exception, you still owe income tax on the withdrawal. The penalty is what you avoid.

Once you reach age 59½, you can withdraw as much as you want, whenever you want, without penalty. You will owe income tax on the withdrawal, but not the extra 10 percent.

Required Withdrawals at Age 73

The IRS does not let you keep money in a regular IRA indefinitely. Starting at age 73, you must withdraw a minimum amount each year, calculated based on your age and account balance. This is called a required minimum distribution or RMD. If you do not take it, the IRS charges a penalty on the amount you should have withdrawn.

The RMD calculation is set by IRS tables, and your bank or brokerage will usually calculate it for you and tell you the amount. You can always withdraw more than the minimum, but you cannot withdraw less without facing a penalty.

Where to Open a Regular IRA and What Investments You Can Hold

You can open a regular IRA at most banks, credit unions, and brokerages. The account itself is just a container—what matters is what you put inside it. Some IRAs are set up as savings accounts that earn a fixed interest rate. Others let you invest in stocks, bonds, mutual funds, or exchange-traded funds (ETFs). A few allow alternative investments like real estate or precious metals, though these are less common.

When you open an IRA, you choose the institution and the investment type based on what you want to do with the money. A bank IRA might offer a fixed rate and simplicity. A brokerage IRA gives you more investment options but requires you to make investment decisions. There is no single "right" choice—it depends on your comfort level and goals.

Regular IRA vs. Roth IRA: The Key Difference

A regular IRA and a Roth IRA are both retirement accounts, but they work in opposite directions on taxes. With a regular IRA, you may deduct contributions now and pay taxes later on withdrawals. With a Roth IRA, you contribute money that has already been taxed, but withdrawals in retirement are tax-free.

A Roth also has no required minimum distributions and allows penalty-free withdrawals of contributions (though not earnings) before age 59½. The trade-off is that Roth contributions are not tax-deductible, and you cannot contribute to a Roth if your income is above a certain threshold. Which one makes sense depends on whether you expect your tax rate to be higher or lower in retirement, and on your current income.

Frequently Asked Questions

Can I have both a regular IRA and a Roth IRA?

Yes, you can have both accounts at the same time. However, the total amount you contribute to all IRAs combined cannot exceed the annual limit set by the IRS. If the limit is $7,000 and you contribute $4,000 to a regular IRA, you can contribute only $3,000 to a Roth that year.

What happens to my regular IRA if I change jobs?

Your IRA stays yours and is not tied to your employer. You can keep it where it is, move it to a different bank or brokerage, or roll it into your new employer's retirement plan if they allow it. The account continues to grow regardless of your employment.

Do I have to invest the money in my IRA, or can I just leave it in cash?

You can leave it in cash if your IRA is held at a bank as a savings account. You will earn whatever interest rate the bank offers. If your IRA is at a brokerage, you typically must choose an investment, though some brokerages offer money market funds or cash equivalents that function like savings accounts.

Can I withdraw my contributions without penalty before age 59½?

With a regular IRA, no—the 10 percent early withdrawal penalty applies to contributions and earnings alike. With a Roth IRA, you can withdraw contributions (but not earnings) penalty-free at any time. This is one reason some people prefer a Roth if they think they might need access to their money before retirement.

What if I contribute too much to my IRA in a year?

If you exceed the annual limit, the IRS charges a 6 percent penalty tax on the excess amount each year it stays in the account. You can fix this by withdrawing the excess and any earnings on it before your tax deadline. Your bank or brokerage can help you calculate what to withdraw.