Traditional IRA Basics: Tax Benefits, Rollovers, Roth Conversions & RMDs Explained
Traditional IRA basics: why it still matters
A traditional IRA remains a cornerstone of retirement planning because it combines tax-deferral with flexible contribution and rollover options.
Contributions may be tax-deductible depending on your income, filing status, and whether you or your spouse are covered by a workplace retirement plan, which can lower your current taxable income while allowing investments to grow without immediate tax drag.
How contributions and deductions work
– Eligibility is tied to earned income. You can contribute if you have compensation from work.
– Deductibility depends on your income and whether you (or your spouse) participate in an employer-sponsored retirement plan. If you or your spouse are covered at work, higher income can reduce or eliminate the deduction under current IRS rules.
– Even if your contribution isn’t deductible, a traditional IRA can still be useful for tax-deferred growth; nondeductible contributions create basis that must be tracked for tax purposes.
Rollovers, transfers and consolidation
A traditional IRA is a common destination for rollovers from employer plans when changing jobs or retiring.
Trustee-to-trustee transfers preserve tax benefits and avoid withholding. If you do an IRA-to-IRA rollover yourself, be mindful of rollover timing and rules—many investors prefer direct transfers to eliminate the risk of tax consequences.
Converting to Roth and the backdoor strategy
Converting traditional IRA assets to a Roth IRA can be an effective move if you expect to pay a lower tax rate today than in retirement. Conversions are taxable to the extent the converted amount was previously untaxed.
High earners who are ineligible to contribute directly to Roth IRAs often use a “backdoor” strategy—making nondeductible traditional IRA contributions and then converting them to Roth—while carefully tracking basis using IRS forms required for after-tax contributions.
Withdrawals and exceptions
Withdrawals from a traditional IRA are generally taxed as ordinary income to the extent they came from tax-deductible contributions or pre-tax rollovers. There is also an additional tax penalty for distributions taken before the age when penalties no longer apply under current rules, but a variety of exceptions can waive that extra tax for qualifying events such as first-time home purchases, qualified education expenses, certain medical costs, disability, and other specific circumstances. Check current guidance for details that apply to your situation.
Required distributions and inheritance considerations
At a certain age determined by current law, account holders must begin taking required minimum distributions.
Recent changes to retirement rules have also altered how inherited IRAs can be stretched by many non-spouse beneficiaries, shortening distribution windows in many cases. Naming beneficiaries and reviewing beneficiary designations regularly can prevent unintended tax outcomes and ensure your assets pass according to your wishes.
Practical planning tips
– Compare your current tax rate with your expected retirement tax rate before choosing deductible contributions versus Roth conversions.
– Keep clear records of any nondeductible contributions and file necessary tax forms to avoid double taxation.
– Consider rolling employer plan money into an IRA for broader investment choices, but weigh that against the asset protection and loan options offered by some employer plans.
– Review beneficiary designations after major life events and consult a tax or financial advisor to integrate IRA choices with estate and tax planning.
A traditional IRA remains a flexible, tax-advantaged account when used with a clear strategy. Regularly review account types, contribution options, and distribution rules to make choices that align with your long-term financial goals and tax situation.