Definition
An IRA funded with money that may be tax-deductible now, growing tax-deferred until withdrawal, when it is taxed as ordinary income. Deductibility can phase out if a workplace plan covers you, and required minimum distributions eventually apply.
Why it matters
The traditional IRA is a bet that your tax rate in retirement will be lower than it is today: deduct at a high rate now, withdraw at a lower one later. It is also the receiving account for most 401(k) rollovers.
Example
A worker in the 22% bracket contributes $400 a month, $4,800 a year, and deducts it, trimming about $1,056 off this year's taxes. The money compounds untaxed for decades; every withdrawal in retirement is then taxed as that year's income.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.