Traditional IRA contributions are usually pre-tax, which means you deduct them from your taxable income in the year you make them

When you put money into a traditional IRA, you typically reduce your federal taxable income by that amount. If you earn $60,000 and contribute $7,000 to a traditional IRA, your taxable income drops to $53,000 for that tax year. You pay no income tax on that $7,000 when you contribute it—only when you withdraw it in retirement.

This tax break has limits. Your ability to deduct a traditional IRA contribution depends on whether you or your spouse have access to a workplace retirement plan like a 401(k), and how much you earn. If neither of you has a workplace plan, you can deduct the full amount you contribute. If one of you does have a workplace plan, the deduction phases out at higher income levels, and it phases out completely at even higher levels.

The IRS sets the income thresholds for these phase-outs each year, and they differ depending on your filing status and whether you have a workplace plan. You can find the current limits on the IRS website or ask your tax preparer what applies to your situation.

Key Takeaways

  • Traditional IRA contributions reduce your taxable income in the year you make them, lowering the federal income tax you owe that year.
  • The pre-tax deduction is only available if you meet income and workplace plan requirements set by the IRS each year.
  • Money you withdraw from a traditional IRA in retirement is taxed as ordinary income, so the tax is deferred, not eliminated.
  • You can contribute after-tax money to a traditional IRA even if you cannot deduct it, though the tax treatment on withdrawal becomes more complicated.

When the pre-tax deduction phases out or disappears

If you have a 401(k), 403(b), or other workplace retirement plan, the IRS limits how much of your traditional IRA contribution you can deduct. The phase-out range depends on your filing status: single filers, married filing jointly, and married filing separately each have different income cutoffs.

For example, if you are single and your employer offers a 401(k), your deduction begins to phase out at one income level and disappears completely at a higher level. If you are married filing jointly and only one spouse has a workplace plan, the phase-out applies only to that spouse—the other spouse may still deduct the full contribution.

If your income falls within the phase-out range, you can deduct part of your contribution. If your income exceeds the upper limit, you cannot deduct any of it. In that case, you can still contribute to a traditional IRA, but the contribution is made with after-tax dollars.

After-tax contributions to a traditional IRA

You can put after-tax money into a traditional IRA even if you cannot deduct it. This is different from a Roth IRA, which is always funded with after-tax money but grows tax-free. With a traditional IRA funded after-tax, the money grows tax-deferred, but when you withdraw it, you owe tax only on the earnings, not on the after-tax principal you contributed.

Tracking after-tax contributions gets complicated if you have multiple IRAs or if you have already made deductible contributions. The IRS uses a "pro-rata rule" that treats all your traditional IRAs as one account for tax purposes. If you have $50,000 in deductible contributions and $10,000 in after-tax contributions across all your traditional IRAs, withdrawals are taxed proportionally. This can create unexpected tax bills and is one reason many people work with a tax professional when mixing deductible and after-tax contributions.

How the tax deferral works in retirement

The pre-tax advantage of a traditional IRA is that you avoid income tax when you contribute. The trade-off is that you pay income tax on every dollar you withdraw in retirement. If you contributed $7,000 pre-tax and it grew to $25,000, you owe income tax on the full $25,000 when you take it out.

You must start taking withdrawals from a traditional IRA at age 73 (as of 2023, under current law). These are called required minimum distributions, or RMDs. The IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the full amount, you face a penalty on the shortfall.

The tax you pay on withdrawals depends on your tax bracket in retirement. If you are in a lower tax bracket then than you were while working, the pre-tax deduction saves you money. If you are in the same or higher bracket, the advantage is smaller or disappears.

Pre-tax traditional IRA vs. Roth IRA

A Roth IRA works the opposite way. You contribute after-tax money and cannot deduct it, but the money grows tax-free and you owe no tax on withdrawals in retirement. There are no required minimum distributions from a Roth during your lifetime.

The choice between a traditional IRA and a Roth depends on whether you expect to be in a higher or lower tax bracket in retirement, how much you earn now, and your personal tax situation. If you are in a high tax bracket now and expect to be in a lower one in retirement, a traditional IRA's pre-tax deduction may save you more money overall. If you expect to be in the same or higher bracket, a Roth's tax-free growth may be better.

You can also have both a traditional IRA and a Roth IRA, but your total contributions across both accounts cannot exceed the annual limit set by the IRS. The limit is the same whether you fund one account or split between two.

Income limits for traditional IRA deductions

The IRS updates income phase-out ranges every year. These ranges vary by filing status and whether you have a workplace retirement plan. If you are single with no workplace plan, you can deduct the full contribution no matter how much you earn. If you are single with a workplace plan, the deduction phases out within a specific income range that changes annually.

Married couples filing jointly have different limits than single filers. If both spouses have workplace plans, each has their own phase-out range. If only one spouse has a workplace plan, that spouse's deduction phases out within the range for married filing jointly, while the other spouse may be able to deduct the full contribution.

The IRS publishes these limits in Publication 590-A each year. You can also find them on the IRS website or ask your tax preparer what applies to your income and filing status.

Contribution limits and deadlines

The annual contribution limit for a traditional IRA is set by the IRS and increases periodically. For 2024, the limit is $7,000 for people under age 50, and $8,000 for people age 50 and older (the extra $1,000 is called a catch-up contribution). These limits apply to the total you contribute across all IRAs—traditional and Roth combined.

You can contribute to a traditional IRA for a given tax year until the tax filing deadline the following year, usually April 15. If you miss that deadline, you cannot go back and make a contribution for that year unless you file an amended return and request an extension from the IRS.

Frequently Asked Questions

Can I deduct a traditional IRA contribution if I have a 401(k) at work?

It depends on your income. If your income is below the phase-out range for your filing status, you can deduct the full amount. If your income falls within the phase-out range, you can deduct part of it. If your income exceeds the upper limit, you cannot deduct any of it. The IRS publishes the exact ranges each year.

What happens if I contribute after-tax money to a traditional IRA?

You can do this, but it complicates your taxes. When you withdraw the money in retirement, you owe tax only on the earnings, not on the after-tax principal. However, the IRS pro-rata rule means that if you have multiple IRAs with both deductible and after-tax contributions, withdrawals are taxed proportionally across all accounts.

Do I have to pay tax on traditional IRA withdrawals in retirement?

Yes. Every dollar you withdraw from a traditional IRA is taxed as ordinary income in the year you withdraw it. The only exception is the portion that came from after-tax contributions, which is not taxed again. This is why tracking after-tax contributions is important.

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

Yes, but your total contributions across both accounts cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can contribute only $3,000 to a Roth that same year (assuming the limit is $7,000).

What if my income is too high to deduct a traditional IRA contribution?

You can still contribute after-tax money to a traditional IRA. Alternatively, you may be able to contribute to a Roth IRA if your income is below the Roth phase-out limits, which are higher than the traditional IRA limits. A tax professional can help you decide which option makes sense for your situation.