Traditional IRA

A traditional IRA is an individual retirement arrangement you open at any brokerage, fund with up to $7,500 in 2026 (plus a $1,100 catch-up from age 50), and invest however you like. Contributions may be tax-deductible: if neither you nor your spouse is covered by a workplace plan, the deduction is unconditional. If either is covered, it phases out with income, running $81,000 to $91,000 single and $129,000 to $149,000 joint for the covered spouse in 2026, per the IRS. Growth compounds tax-deferred, with no annual tax on dividends or gains, and withdrawals are taxed as ordinary income.

The account is broader than a 401(k) in one dimension: the investment menu is everything the brokerage sells. Fees run lower, since a plain index IRA costs nothing to hold. It is narrower in another: the contribution cap is a fraction of the 401(k)'s. Withdrawals before 59½ generally owe ordinary income tax plus a 10% penalty, with specific exceptions for death, disability, first-home purchases up to $10,000, higher education, and substantially equal payments.

Open the account at a brokerage, fund it by the tax-filing deadline (April 2027 for the 2026 tax year), and invest it. The deduction, when allowed, reduces taxable income dollar for dollar: $7,500 deducted at a 24% marginal rate saves $1,800 in April. When the deduction phases out, the contribution still goes in and still compounds tax-deferred, but the upfront benefit is gone. The contribution is then made with after-tax dollars that must be tracked on Form 8606.

The compounding works exactly as a 401(k)'s: dividends reinvest, gains roll, and the IRS takes nothing until withdrawal. At withdrawal, every dollar that was deducted comes out as ordinary income, while nondeductible contributions (your basis) come out tax-free; the IRS's pro-rata rule tracks basis across all your IRAs combined. Required minimum distributions start at 73 under SECURE 2.0, calculated as the prior year-end balance divided by an IRS factor. A $500,000 balance at 73 divided by 26.5 requires roughly $18,900 in year one. Roth IRAs have no such requirement during the owner's lifetime, which is the quiet argument for funding the Roth instead at lower incomes.

For the roughly a third of private-sector workers without a workplace plan, the IRA is the main tax shelter available. The deduction-plus-deferral combination is worth real money: $7,500 deducted at 22% saves $1,650 a year, and the deferral keeps the IRS out of every dividend and rebalance until 73. The phase-outs are the trap: many dual-income households with workplace coverage discover the deduction is already shrinking or gone at incomes they consider ordinary.

I watched a colleague named Brent (yes, that Brent) fund a traditional IRA for two years while covered by his employer's plan, then discover the deduction had phased out at his income. The contributions sat in after-tax limbo with no Form 8606 filed, which turned his eventual rollover arithmetic into a pro-rata puzzle. He called the IRA useless; the missing form was the problem.

The highest-leverage thing most Americans can do is decide traditional versus Roth on marginal-rate arithmetic. File Form 8606 whenever a contribution is nondeductible, and let the deferral do its job. Model the choice with the taxable vs deferred calculator or the retirement account calculator.