Introduction to traditional IRAs

Introduction to traditional IRAs

A traditional individual retirement account (IRA) allows your client to save for retirement. There is no minimum amount required to open, and contributions to the account grow tax-deferred. Withdrawals are tax reportable and may be subject to penalties if withdrawn prior to age 59½.

Required minimum distributions (RMDs) must begin the year the account holder reaches the federal RMD age to avoid tax penalties.

A traditional IRA can be contributory, rollover, or spousal and is funded from earned income Tooltip .

When advising on the right type of IRA account for your clients, review the following deadlines and tax considerations:

  • Establish a traditional IRA: April 15 of the following year for which the contributions are meant. 
  • If April 15 falls on a weekend or holiday, the deadline is the next business day.
  • Regular IRA contributions made between January 1 and April 15 require additional direction from the account holder as to the year the contribution should be applied.
  • Contribution limits apply.
  • No minimum to open.
  • Beginning tax year 2020, working individuals with earned income may contribute to a traditional IRA regardless of age. The repeal of the maximum age for traditional IRA contributions is for tax year 2020 and beyond.
Withdrawal Penalties
  • There is a 10% federal penalty for withdrawals taken before age 59 1/2 if they do not meet early withdrawal exceptions. State penalties may apply.
  • There are no penalties if used for qualified higher education; certain first-time home purchases up to $10,000; substantially equal periodic payments; in cases of death, disability, or qualified medical reasons; or birth of a child or adoption. Schwab will not determine whether the account qualifies for an IRS exception. When in doubt, contact a tax advisor.
Tax Ramifications

Upon withdrawal, all pretax contributions, dividends, interest, and capital gains are taxed as ordinary income.
All interest earnings are tax-deferred until withdrawal. The maximum permitted annual contribution (including any catch-up contributions) may be tax-deductible if:

  • Neither holder nor spouse is covered by an employer-sponsored plan; or
  • If modified adjusted gross income (MAGI) falls below the limits listed in the chart below, contributions may be partially tax-deductible. Have your client consult a tax advisor.
Account holder statusCan deduct entire contribution if 2024 MAGI is less than:Cannot deduct contribution if 2024 MAGI is greater than:
Single account holder participates in employer-sponsored retirement plan.$77,000$87,000
Married account holder participates in employer-sponsored retirement plan.$123,000$143,000
Married account holder's spouse participates in employer-sponsored retirement plan, but the account holder does not.$230,000$240,000
Account holder statusCan deduct entire contribution if 2023 MAGI is less than:Cannot deduct contribution if 2023 MAGI is greater than:
Single account holder participates in employer-sponsored retirement plan.$73,000$83,000
Married account holder participates in employer-sponsored retirement plan.$116,000$136,000
Married account holder's spouse participates in employer-sponsored retirement plan, but the account holder does not.$218,000$228,000

For information regarding income limitations, rollovers, conversions, and more, refer to the following table:

Income limitationsNone, although income limitations may exist on the contribution's tax-deductibility.
RolloversRollovers to a traditional IRA are accepted from other traditional IRAs or employer-sponsored retirement plans.
Account ProtectionSchwab offers protection for cash assets in Schwab One® accounts.
HouseholdingSchwab automatically groups qualified accounts of individuals with the same last name at the same home address into a household.

For comparison of the two main types of individual retirement accounts, see IRA Comparisons.

Additional IRA comparisons:

Account typeDescription
Traditional IRAA traditional IRA can be contributory, rollover, or spousal.
Roth IRA

An individual retirement account featuring post-tax contributions with tax-free growth.

  • Your client's ability to contribute to a Roth IRA depends on his or her adjusted gross income.
  • See Roth Conversion FAQs for details about converting traditional, SEP, or SIMPLE IRA assets to a Roth IRA.
Custodial IRAA traditional or Roth IRA account established for a minor who has earned income. The custodian must be at least 18 years of age.
Inherited IRAAlso known as a beneficiary IRA, an inherited IRA is available to any designated beneficiary upon the death of the original IRA holder.
403(b)(7) custodial account

Prior to 2007, employees of tax-exempt charitable, educational, or religious institutions offering 403(b) plans could transfer their plan assets to a 403(b)(7) custodial account in order to broaden their investment choices.
Effective September 25, 2007, Schwab no longer opens or accepts transfers or deposits of any kind into 403(b)(7) accounts. The change was made to comply with Internal Revenue Service regulations (IRS 403[b] Final Regulations) issued July 26, 2007, that impact all providers of 403(b)(7) accounts. We continue maintaining existing accounts as usual, including statements and tax reporting.

  • Disbursement authority (WPFA), margin, option, Schwab One® and Schwab MoneyLink® features are not available on 403(b)(7) accounts.
  • Investment options are strictly limited to mutual funds and money market instruments.

Can my client contribute to a traditional IRA and Roth IRA in the same year?
Yes, total contribution cannot exceed the annual contribution limit. If your client is ineligible to make the full contribution to the Roth due to Modified Adjusted Gross Income (MAGI), the remaining amount can be contributed to the traditional IRA.

Can my client make a stock contribution to an IRA?
No. Cash or cash equivalents are the only method for IRA contributions. If the stock certificate was originally in an IRA or qualified retirement plan (pre-tax money) your client can deposit the certificate into a traditional IRA as a rollover contribution.

My client took a distribution but rolled it back within 60 days. Why is this still reported on a Form 1099-R?
IRA account holders may take one 60-day distribution per all IRA accounts in a 12-month period without incurring taxes or penalties as long as the distribution is rolled back in-kind (e.g., cash for cash distributions, and the same security for a distribution of securities) within 60 days. Although a taxable event has not occurred, IRS regulations require that both the distribution and the rollover contribution be reported to the IRS on Forms 1099-R and 5498.

What is the procedure when an IRA account holder dies?
If the IRA account holder dies, we need a certified copy of the death certificate and the applicable inherited IRA account application completed for each surviving beneficiary. The form will provide detailed instruction on how Schwab is to distribute the assets to the beneficiary. There are some circumstances that require additional documentation:

  • If the beneficiary is a trust, submit trust documents.
  • If the beneficiary is the estate, submit Letters Testamentary.

What is the difference between a rollover IRA and a contributory IRA?
These names describe how the assets are deposited in the retirement account. A contributory IRA, also known as a traditional IRA, is opened to make annual contributions. A rollover IRA is also a traditional IRA and is opened to permit the tax-free movement of assets from a qualified retirement account such as a 401(k). It is designed for individuals who have terminated employment, retired or whose company has terminated its retirement plan and want to preserve the ability to roll these assets back into another employer plan later. You can co-mingle assets and make annual contributions to a rollover IRA or transfer assets from a qualified retirement account to a traditional IRA, but you may lose the ability to roll into an employer plan if the receiving plan only accepts assets that weren't co-mingled.

Can my client combine a SEP-IRA with a traditional IRA?
The client may choose to combine the SEP-IRA into a traditional IRA, but the annual SEP-IRA contribution limits will no longer apply; the client will have to use the traditional IRA contribution limits. Instead, the client may choose to combine all Schwab IRAs into a SEP-IRA, which will allow them to continue using either the annual SEP-IRA contribution limits or the annual traditional IRA contribution limits.

Can Schwab withhold state taxes on my client's IRA distribution?
Yes. State taxes can be withheld from a distribution if withholding is allowed by your client’s state of residence.

The following are available to assist you:

How to add and update account beneficiaries
How to convert accounts
How to open a custodial IRA
How to open an inherited IRA
How to open a traditional IRA
How to roll over assets to a Schwab account
Introduction to cash options and investments
Introduction to custodial IRAs
Introduction to inherited IRAs
Introduction to qualified retirement plans (QRPs)
Introduction to required minimum distributions (RMDs)
Introduction to Roth IRAs
Introduction to SEP-IRAs
Introduction to SIMPLE IRAs