An IRA may not be the most exciting investment in your portfolio, but it’s certainly versatile. An IRA, or individual retirement account, is an investment account designed to help you tuck away money for your golden years. There are different types of IRAs, but here, I’m looking at the benefits of a traditional IRA.
1. Sweet tax breaks
After retirement, most people see their annual income drop, and that’s one of the things that makes an IRA so attractive. Depending on your circumstances, your annual contributions to an IRA may be fully deductible, meaning you don’t have to pay taxes on that money until you begin making withdrawals.
Traditional IRAs make perfect sense for investors who expect to earn less in retirement, thereby falling into a lower tax rate and paying lower taxes on the money they withdraw. While anyone can contribute to a traditional IRA, how much you can deduct from taxes depends on two things:
- Whether you are covered by a retirement plan at work
- Your annual income the year the contributions were made
Here are deduction limits for 2025 if you’re not covered by a retirement plan at work:
|
Filing Status |
Modified Adjusted Gross Income (MAGI) |
Amount You’re Eligible to Deduct |
|---|---|---|
|
Single, head of household, or qualifying widow(er) |
Any amount |
Full deduction |
|
Married filing jointly (with a spouse who is not covered by a retirement plan at work) |
Any amount |
Full deduction |
|
Married filing jointly (with a spouse who is covered by a retirement plan at work) |
$236,000 or less $236,000 to $246,000 More than $246,000 |
Full deduction Partial deduction No deduction |
|
Married filing separately (with a spouse covered by a retirement plan at work) |
Less than $10,000 More than $10,000 |
Partial deduction No deduction |
Data source: Fidelity.
And here are the deduction limits for 2025 if you are covered by a retirement plan at work:
|
Filing Status |
Modified Adjusted Gross Income (MAGI) |
Deduction Limit |
|---|---|---|
|
Single |
$79,000 or less $79,000 to $89,000 More than $89,000 |
Full deduction Partial deduction No deduction |
|
Married filing jointly |
$126,000 or less $126,000 to $146,000 More than $146,000 |
Full deduction Partial deduction No deduction |
|
Married filing separately |
$10,000 or less More than $10,000 |
Partial deduction No deduction |
Data source: Fidelity.
Image source: Getty Images.
2. Potential to contribute more
For the 2025 tax year, investors under the age of 50 can contribute up to $7,000. For those 50 and older, the contribution limit increases to $8,000.
An increase of $1,000 may not seem like much at first glance, but imagine this: You open a traditional IRA at age 50 and contribute $7,000 annually, earning an average annual return of 8%. At your full retirement age of 67, your account would hold about $255,150.
However, if you took advantage of the higher limit for those 50 and older by contributing $8,000 annually instead, your account would be worth about $291,600. That’s roughly $36,450 more you could put toward medical deductibles or home maintenance.
3. Potential to contribute even more
While $7,000 or $8,000 is your annual contribution limit (depending on your age), if you have a non-wage-earning spouse, they can also open an IRA to save for retirement. This allows you to save twice as much as you would have otherwise. Plus, if you qualify, you can use both accounts as a tax deduction.
According to the IRS, each of you can contribute up to the current limit. The only catch is that your combined contributions cannot be greater than your total taxable compensation for the year.
4. Four extra months to contribute
Unlike most retirement plans, Dec. 31 isn’t the last day you can contribute for that tax year. You have until Tax Day (typically April 15) of the following year to hit your contribution goal. Let’s say your income depends heavily on commission, but you suffered a tough year financially. You have four extra months to make up any contributions you couldn’t make earlier.
For example, rather than make all contributions by Dec. 31, 2025, you can continue to put money into your traditional IRA until April 15, 2026.
5. It’s not either/or
IRA contribution limits are not very high, which makes it challenging to retire on them alone. Fortunately, you don’t have to. You can use a traditional IRA to supplement your retirement plan as part of a more comprehensive portfolio. That means you can diversify the types of investment vehicles you invest in. It’s fine to have a 401(k) and a traditional IRA, even if you don’t get to take the full tax deduction. After all, even without the tax deduction, an IRA provides an additional income source for retirement. In fact, you can add an IRA to pretty much any other investments you make, including brokerage accounts, certificates of deposit (CDs), stocks, high-yield savings accounts, and HSAs.
Setting up an IRA is as simple as contacting a bank or brokerage firm you respect, providing the documents it requests, filling out paperwork, and funding the account. It’s fast, easy, and one more way to look out for your long-term future.
