A traditional individual retirement account (IRA) is a retirement savings account that allows you to potentially reduce your taxes in the current tax year while building your retirement savings tax-deferred. If you’re not currently funding an IRA, you may be short-changing yourself both now and in the future.

Advantages of a traditional IRA

When you contribute to a traditional IRA, every qualified IRA investment dollar you add to your account may reduce your taxable income by the same amount. If you contribute the maximum amount each year, which is $7,000 for an individual under 50 and $8,000 for people 50 and over in 2025 and $7,500 ($8,600 for 50 and up) for 2026, you may be able to reduce your taxable income by that same amount.

For example, if you’re in the 25% tax bracket, a $7,500 contribution could save you about $1,875 in taxes. If you’re in the 10% bracket, it could save you about $750.

Note that your tax deduction may be limited due to your income and other factors such as your or your spouse’s ability to participate in an employer-sponsored retirement plan such as a 401(k). See details on deductions and contribution limits.

Build retirement savings with a traditional IRA

By contributing to your IRA each year, you may accumulate a substantial nest egg by the time you retire. For example, let’s say you contribute $7,500 a year to an IRA and invest the money in a mutual fund that earns an average annual return of 7%.

Based on 7% annual growth, with a $7,500 annual contribution made at the beginning of the year, here’s how much an IRA would grow over the next four decades:

After 10 years, the IRA would have grown to $110,877, after 20 years it would have grown to $328,989, after 30 years it would have grown to $758,048, and after 40 years it would have grown to over $1 million at $1,602,072.

Contributing as much as possible to your IRA may require some small sacrifices in the short-term, but it’s well worth the effort if you may be able to reduce your current year’s taxes while building a tax-deferred retirement nest egg for the long term.

The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.