Get the app
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app
Teach Me

What’s a Traditional IRA? All About This Retirement Savings Account

October 24, 2017

  • Anyone can set up an individual retirement account, or IRA.
  • With Stash, it’s an investment account that lets you put money away on a tax-deferred basis.
  • $6,000: That’s the full amount you can invest per year into all IRAs in your name.
2 min read

Congratulations! You’ve made the awesome decision to start planning for your retirement and are now the proud owner of a traditional IRA. Still have questions? We’re here to answer them.

Here’s a quick explainer about what a traditional IRA is and how it works:

What’s a traditional IRA?

A traditional IRA is an investment savings account with significant financial advantages. It lets you contribute money on a pre-tax basis until you turn 70 1/2. That means the money you put in comes from your gross income, and your contribution can lower your annual tax bill.

The money you’ve put away can then be invested in stocks, bonds, mutual funds, money market funds, ETFs and index funds, and other investments.  Your balance in the account can grow tax deferred through retirement, when you’ll pay taxes only on disbursements from the account.

How much can I put in my traditional IRA?

Good question. There are annual limits to what you can contribute. You can put up to $6,000 away each year. But once you’re age 50 or older, you can contribute up to $7,000 annually.

I still don’t get it, how does this work?

Okay, here are two easy examples. Let’s say you earn $50,000 annually. If you fully fund your IRA for the year up to your $6,000 limit, your IRA contribution can lower your taxable income to $44,000. Now let’s say you have less money to put away, maybe half that amount.

If you put $2,750 away, you could still lower your taxable income by that amount, to $47,250. In short, you could pay less income tax, and you’d be saving for your retirement at the same time. That could good deal.

When can I take my money out?

You can take money out of the account at any time, but before age 59½ you may have to pay a 10% penalty to the Internal Revenue Service (IRS), in addition to income taxes. For most people, that rate is around 20% for federal taxes. So, you could essentially lose close to a third of the value of the money you pull out early.

After age 59 ½, you can take money from the account with no penalties, although any money you withdraw you’ll have to pay income taxes on.

By age 70½ you’re actually required by the IRS to start taking money out of your account. This is called a required minimum distribution (RMD). (An RMD is based on a complicated formula based on a percentage of the total balance of the account and your life expectancy.)

If you don’t take your full RMD, you’ll also be hit with a steep tax of 50% on the difference between your RMD and what you’ve actually taken out each year.

Can I use my IRA money for anything else?

Yes, you can use up to $10,000 from your IRA to purchase a first home. That amount will not be subject to an IRS penalty of 10%, but you will have to pay income taxes on the money.

Other things to keep in mind:

Unlike with a 401(k), where your employer handles all the hard work and makes regular payroll deductions to your account, you’re responsible for funding your own IRA. You can do that in one lump sum each year, or via automatic monthly deductions from your bank account with your IRA provider.

Are you ready?

Get Stash Retire.

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

Next for you
IRA vs. 401K: Everything You Need to Know to Decide

Investment Profile

Bonds Worldwide

An International Bond ETF on Stash

Learn more
Explore more articlesChoose a topic to learn more about
politics market news Technology Careers Retirement

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit