Top 10 Traditional IRA Myths That Could Be Undermining Your Retirement Strategy

Traditional IRAs remain one of the most accessible and tax-efficient tools for retirement savings. However, many investors fall prey to widespread misunderstandings that can limit their benefits. To help you maximize your retirement potential, we debunk 10 persistent myths about traditional IRAs.

Key Insights You Should Know

• Non-working spouses can contribute to a spousal IRA if the working spouse has sufficient earned income.
• You can contribute to both an IRA and a 401(k), but income thresholds may reduce your traditional IRA deduction if you have a 401(k).
• High-income earners can still contribute to traditional IRAs, though contributions might be non-deductible.
• Holding both traditional and Roth IRAs allows for tax diversification in retirement.
• Thanks to the SECURE Act, there’s no longer an age limit to contribute to a traditional IRA, provided you have earned income.

Myth 1: Contributions Are Only Allowed With Earned Income

Truth: While single filers must have earned income to contribute, married couples filing jointly can contribute to a spousal IRA even if one spouse doesn’t earn income, as long as the other spouse has sufficient earnings. This enables stay-at-home spouses or retirees to build retirement savings effectively.

Myth 2: You Cannot Have an IRA if You Have a 401(k)

Truth: You may contribute to both a 401(k) and a traditional IRA. However, your ability to deduct IRA contributions depends on your income level and participation in an employer-sponsored plan. For example, in 2024, married couples filing jointly can fully deduct IRA contributions if their modified AGI is below $123,000; partial deductions apply up to $143,000.

Income Limits for Single Filers

Single filers receive a full deduction below $77,000 AGI in 2024, with a phase-out range up to $87,000.

Myth 3: High Earners Cannot Contribute to IRAs

Truth: High-income individuals can make non-deductible traditional IRA contributions regardless of income, subject to annual limits ($7,000 or $8,000 if age 50+ for 2024 and 2025). These contributions still allow tax-deferred growth.

Myth 4: You Can Only Choose Between a Roth or Traditional IRA

Truth: You can maintain both Roth and traditional IRAs simultaneously to diversify tax treatment of contributions and withdrawals. However, the combined contribution limit applies across all IRAs.

Myth 5: Traditional IRAs Always Save Taxes in Retirement

Truth: Tax benefits depend on your current versus future tax bracket. While traditional IRAs offer upfront deductions, Roth IRAs might be more valuable if you expect higher taxes later. Reinvesting tax savings from traditional IRAs is crucial to maximize benefits.

Myth 6: IRAs Are Only for Retirement

Truth: Though designed for retirement, IRAs allow penalty-free early withdrawals for specific reasons such as first-time home purchases, qualified education expenses, certain medical costs, and disaster-related losses.

Myth 7: Opening an IRA Means Your Money Is Invested

Truth: An IRA is a tax-advantaged account, not an investment itself. You must actively select investments like stocks, bonds, mutual funds, ETFs, or even real estate to grow your IRA funds.

Myth 8: Children Cannot Contribute to IRAs

Truth: Minors with earned income can contribute to custodial IRAs, with adults acting as custodians until adulthood. Contributions cannot exceed the child’s earned income or annual limits.

Myth 9: You Can’t Contribute to IRAs After a Certain Age

Truth: The SECURE Act removed age restrictions on traditional IRA contributions. As long as you have earned income, you can contribute regardless of age, aligning with Roth IRA rules.

Myth 10: IRA Funds Can Remain Untouched Forever

Truth: IRAs are subject to required minimum distributions (RMDs) starting at age 73 or 75 depending on birth year. Beneficiaries also face RMD rules, which can impact estate planning and tax liabilities.

Main Drawback of Traditional IRAs

Withdrawals are taxed as ordinary income, which can reduce your net retirement income. Contribution limits are lower than some employer plans, and early withdrawals may incur penalties.

Why Might Your Traditional IRA Lose Value?

Market fluctuations, poor investment choices, high fees, early withdrawals, or inconsistent contributions can cause losses. Diversification and strategic planning help mitigate these risks.

Does the 5-Year Rule Apply to Traditional IRAs?

No, the 5-year rule applies to Roth IRAs, requiring five years before earnings can be withdrawn tax- and penalty-free after age 59½.

Can You Have Both a Traditional IRA and a 401(k)?

Yes, you can contribute to both. In 2024, 401(k) limits are $23,000 plus catch-up contributions, while traditional IRA limits are $7,000 with catch-up options. Tax deductibility of IRA contributions may be limited by income and 401(k) participation.

Conclusion

Understanding and dispelling common IRA myths empowers you to make informed decisions, optimize tax benefits, and enhance your retirement readiness. Consult a financial advisor or IRS resources to tailor strategies to your unique situation.

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