Tax Deferral Is a Loan From the Government
A deductible traditional IRA contribution reduces this year's taxable income. The money then grows without annual tax on dividends or capital gains, and the entire withdrawal — contribution and growth alike — is taxed as ordinary income later. In effect the government lends you the tax on the contribution and collects it decades later, having taken no share of the growth in between.
That deferral is worth real money. A taxable account paying 15% on dividends and realised gains loses roughly 0.5–1.0% of return a year to tax drag, which over 25 years is a fifth of the ending balance.
Deductibility Depends on a Workplace Plan
Anyone with earned income can contribute to a traditional IRA. Whether the contribution is deductible depends on whether you or a spouse are covered by a plan at work:
| Situation | 2025 deduction phase-out (MAGI) |
|---|---|
| Single, covered by a workplace plan | $79,000–$89,000 |
| Married filing jointly, you are covered | $126,000–$146,000 |
| Married, spouse covered but you are not | $236,000–$246,000 |
| No workplace plan at all | Fully deductible at any income |
Non-deductible contributions are still allowed above these limits and are tracked on Form 8606. They create a basis that is not taxed again on withdrawal — and they are the first step of a backdoor Roth.
Withdrawals: 59½, 73, and the Penalty
Withdrawals before 59½ incur income tax plus a 10% penalty, with exceptions for first-time home purchase (up to $10,000), qualified education expenses, substantial medical costs, disability, and a series of substantially equal periodic payments. From age 73, required minimum distributions begin and are not optional — the penalty for missing one is 25% of the shortfall, reduced to 10% if corrected promptly.
The 4% Rule and What It Really Says
The widely cited 4% withdrawal rate comes from research on historical U.S. market returns, testing whether a portfolio survived 30 years of inflation-adjusted withdrawals. It was a finding about worst-case survival, not a recommendation for the average case. In most historical periods a retiree following it died with more money than they started with; in a few, they came close to running out.
Applied to a traditional IRA, remember that the 4% is pre-tax. A $1,000,000 balance yields $40,000 gross and closer to $31,000 spendable at a 22% rate.
Frequently Asked Questions
Can I contribute to both an IRA and a 401(k)?
Yes. The $7,000 IRA limit and the $23,500 401(k) limit are separate. Being covered by the 401(k) may reduce or remove the IRA deduction, but never the ability to contribute.
What is the deadline for a contribution?
The tax filing deadline for that year, typically April 15 of the following year, with no extension for filing extensions.
Should I convert my traditional IRA to a Roth?
The conversion is taxed as income in the year it happens. It usually pays off in a low-income year — early retirement before Social Security begins, a year between jobs, or a year with large deductions — and rarely pays off in a peak earning year.