IRA Calculator

A Traditional IRA provides an immediate tax benefit by allowing you to deduct contributions from your taxable income in the year they are made. If you contribute $7,000 and are in the 24% federal tax bracket, you save $1,680 on your current tax bill. Your investments then grow tax-deferred, meaning you pay no taxes on dividends, interest, or capital gains until you withdraw the money in retirement. This tax deferral allows your full balance to compound without annual tax drag, which can result in significantly more growth over a 30- or 40-year investment horizon compared to a taxable brokerage account.

For 2024, the IRA contribution limit is $7,000 per year, or $8,000 if you are age 50 or older, and these limits apply across all your IRA accounts combined. Anyone with earned income can contribute to a Traditional IRA, but the tax deductibility of contributions depends on whether you or your spouse are covered by a workplace retirement plan. If you have a 401(k) at work, the deduction phases out between $77,000 and $87,000 MAGI for single filers and $123,000 to $143,000 for married filing jointly. Even if your contribution is not deductible, you still benefit from tax-deferred growth inside the account.

Financial advisors generally recommend a prioritization strategy that captures the maximum benefit from both accounts. First, contribute enough to your 401(k) to get the full employer match, since that is essentially free money with an instant 50% to 100% return. Next, max out your IRA for the year, because IRAs typically offer a wider selection of low-cost investment options than most 401(k) plans. If you still have money to invest after maxing your IRA, return to the 401(k) and contribute up to the $23,000 annual limit. This approach balances the employer match benefit of a 401(k) with the flexibility and investment variety of an IRA.

Traditional IRA withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty plus ordinary income taxes, though exceptions exist for first-time home purchases, higher education expenses, and certain medical costs. After age 59½, you can withdraw freely but still owe income tax on every dollar withdrawn. Starting at age 73, the IRS requires you to take Required Minimum Distributions (RMDs) each year, calculated by dividing your account balance by a life expectancy factor from the IRS Uniform Lifetime Table. Failing to take your full RMD results in a steep 25% penalty on the amount not withdrawn, reduced to 10% if corrected within two years.