What Is a Traditional IRA?
A traditional IRA is an individual retirement account where contributions may be tax-deductible in the year they're made. Investments grow tax-deferred, meaning you don't pay taxes on gains until you withdraw the funds in retirement. Withdrawals are taxed as ordinary income, and Required Minimum Distributions (RMDs) must begin at age 73.
Why It Matters
Traditional IRAs are one of the most common retirement savings vehicles, and understanding how they work is essential for retirement income planning. The tax-deferred growth is valuable during your working years, but the eventual taxation of withdrawals — combined with RMD requirements — means you need a strategy for when and how much to withdraw.
For Arizona residents, traditional IRA withdrawals are taxed at the state's 2.5% flat income tax rate in addition to federal income tax. Strategic planning around withdrawal timing, Roth conversions, and Social Security coordination can significantly reduce the total tax paid on traditional IRA funds over your lifetime.
How It Works
Contributions: For 2026, the limit is $7,000 per person ($8,000 if age 50+). Contributions may be tax-deductible depending on your income and whether you (or your spouse) have access to an employer retirement plan.
Tax-deferred growth: You don't pay taxes on investment gains, dividends, or interest while the money remains in the account.
Withdrawals: All withdrawals are taxed as ordinary income at your marginal tax rate. Withdrawals before age 59½ typically incur a 10% early withdrawal penalty in addition to income tax.
Required Minimum Distributions (RMDs): Starting at age 73 (under the SECURE 2.0 Act), you must withdraw a minimum amount each year based on your account balance and life expectancy factor. Failure to take RMDs results in a 25% penalty on the amount not withdrawn.
Beneficiary rules: Inherited traditional IRAs are subject to the 10-year distribution rule for most non-spouse beneficiaries (per the SECURE Act of 2019), meaning heirs must withdraw all funds within 10 years of the owner's death.
Example
A Gilbert engineer earning $120,000 annually contributes $8,000 (including catch-up) to a traditional IRA each year from age 55 to 65. With an average 7% return, the IRA grows to approximately $110,000. While the $80,000 in contributions saved roughly $17,600 in taxes over 10 years (at the 22% bracket), the entire balance — contributions plus $30,000 in growth — will be taxed as ordinary income upon withdrawal. If this engineer retires and falls into a lower tax bracket, the deferral creates net tax savings.
Traditional IRA in Arizona
Arizona taxes traditional IRA withdrawals at the 2.5% flat state income tax rate. Since Arizona doesn't tax Social Security benefits, coordinating traditional IRA withdrawals with Social Security claiming can minimize combined federal and state tax. Many Arizona retirees benefit from strategic Roth conversions during the "gap years" between retirement and age 73 (when RMDs begin), converting traditional IRA funds at lower tax rates.
Common Questions About Traditional IRA
Is a traditional IRA or Roth IRA better for retirement?
What happens if I don't take my Required Minimum Distribution?
Can I still contribute to a traditional IRA after age 70½?
Related Terms
Roth IRA
A Roth IRA is an individual retirement account funded with after-tax dollars. Contributions are not tax-deductible, but ...
Required Minimum Distribution (RMD)
A Required Minimum Distribution (RMD) is the minimum amount you must withdraw annually from tax-deferred retirement acco...
401(k)
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax...
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