10 Myths About Traditional IRAs That Could Be Hurting Your Retirement Savings

Traditional individual retirement accounts (IRAs) are one of the simplest ways to save for retirement—they’re tax-advantaged and easy to set up. But to get the most from them, you need to understand the rules and caveats. 

Misconceptions about traditional IRAs can lead to costly mistakes and missed opportunities, making it crucial to separate fact from fiction. Here, we’re debunking 10 common myths about traditional IRAs. 

What You Need to Know

• If you don’t have paid employment and are married, you can still contribute to a spousal IRA if your spouse has enough earned income.
• You can contribute to both an IRA and 401(k), but income limits may affect your IRA deduction if you have a 401(k).
• High earners can contribute to a traditional IRA, but contributions may be non-deductible due to income limits.
• You can have both traditional and Roth IRAs for tax diversification in retirement.
• Thanks to the SECURE Act, you can contribute to a traditional IRA at any age with earned income.

Myth 1: You Can’t Contribute Without Earned Income

Fact: This is only true if you’re a single taxpayer. If you’re married and file a joint tax return, you can contribute to an IRA even if you don’t have earned income, as long as your spouse has sufficient earned income to cover the contribution. A spousal IRA is a joint IRA that allows a non-earning spouse (for example, a stay-at-home parent or one partner who is retired while the other still works) to save for retirement using an IRA.

Myth 2: You Can’t Have an IRA if You Have a 401(k)

Fact: You can still contribute to an IRA even if you participate in an employer-sponsored retirement plan, such as a 401(k). While you can contribute to both, having a retirement plan at work may limit your ability to deduct traditional IRA contributions, based on your income.

Suppose you’re married filing jointly or a qualifying widow(er) and participate in a 401(k). In that case, you can fully deduct your traditional IRA contribution if your modified AGI is less than $123,000 in 2024 (or less than $126,000 in 2025). A partial deduction is available for AGIs between $123,000 and $143,000 in 2024 and $126,000 and $146,000 in 2025. No deduction is allowed if your AGI is more than $143,000 in 2024 or $146,000 in 2025.

However, let’s say you’re married filing jointly or a qualifying widow(er) and don’t have access to a 401(k) through work, but your spouse does. In that situation, the phaseout range is between $230,000 and $240,000 in 2024 and between $236,000 and $246,000 in 2025. 

Single and Head-of-Household Filers

In 2024, single or head-of-household filers will receive a full deduction with an AGI of less than $77,000, a partial deduction with an AGI between $77,000 and $87,000, and no deduction once your AGI reaches $87,000. In 2025, those limits rise accordingly: a full deduction with an AGI of less than $79,000, a partial deduction between $79,000 and $89,000, and no deduction once your AGI reaches over $89,000.

Note

For taxpayers who are married but filing separately and are active participants in a 401(k) plan, the phaseout range is $0 to $10,000.

Myth 3: High Earners Can’t Contribute to IRAs

Fact: If you’re a high earner, you can still make non-deductible contributions to your traditional IRA, regardless of income level. However, there are limits to how much you can contribute. For 2024 and 2025, your total contributions cannot exceed $7,000, or $8,000 if you’re age 50 or older. If your taxable compensation for the year is less than these limits, your contribution cannot exceed your compensation.

As mentioned, income limits may affect the tax deductibility of contributions if you also have an employer-sponsored retirement plan.

Myth 4: You Can’t Have Both a Roth and a Traditional IRA

Fact: You don’t have to choose between a Roth and a traditional IRA; you can have both. Having both types of IRAs gives you the flexibility to choose between taxable or tax-free contributions and income in retirement. You can even have more than one of each type, but here’s the catch—the total contributions limit applies across all of your IRAs, regardless of type. 

Let’s say you have a traditional IRA and a Roth IRA, and you’re under 50 years old. You can now split your contributions to balance tax-free withdrawals in retirement and tax-free contributions. For example:

• Put $3,500 into a Roth IRA and $3,500 into a traditional IRA
• Contribute $5,000 to a traditional IRA and $2,000 to a Roth IRA

Alternatively, you could put the full amount into one type or the other. The key is that your total contributions can’t exceed the annual contribution limit of $7,000.

Myth 5: Traditional IRAs Will Save You Taxes in the Future

Fact: When deciding which is better for tax savings—a traditional or Roth IRA—most financial advisors say it depends on your current tax rate compared to your anticipated future tax rate. If you believe your tax rate will be lower in the future, it’s always better to invest in a traditional IRA. 

However, according to Tim Maurer, chief advisory officer at SignatureFD, this is an oversold narrative. “For this to work in your favor,” Maurer said, “You have to reinvest the tax money you ‘save’ via the traditional IRA deduction in a taxable account that you won’t touch until retirement. But what do most people do with their tax refunds, regardless of their origin? Spend it! Therefore, Roth dollars are almost always ‘worth more’ than traditional (deductible) dollars—unless you make so little money that you don’t pay any tax.”

Ultimately, understanding what those tax savings really mean can help you make a more informed choice about your retirement investments.

Myth 6: IRAs Are Only for Retirement

Fact: While it’s true that IRAs are primarily designed for personal retirement savings—it’s right there in the name—they can serve other purposes as well. 

In general, withdrawals made before age 59½ are considered “early” or “premature” distributions and incur an additional 10% penalty on top of income tax. But there are several exceptions to the added 10% tax, including:

• Qualified birth or adoption expenses (up to $5,000 per child)
• Economic loss due to a federally declared disaster (up to $22,000)
• Qualified higher education expenses
• Total and permanent disability or death of the IRA owner
• Personal or family emergencies (one distribution per calendar year up to $1,000)
• Qualified first-time homebuyers (up to $10,000)
• Health insurance premiums paid while unemployed

Myth 7: An IRA is Automatically an Investment

Fact: It can be easy to think you just open an IRA, deposit the money, and you’re done–but that’s not the case. An IRA is not an investment in itself; rather, it’s a tax-advantaged container for investments. 

When you put money into an IRA, it remains in cash until you choose what to do with the funds. Common investments held in IRAs include stocks, bonds, mutual funds, and ETFs. One lesser-known secret about traditional IRAs is that the account can also hold real estate.   

Myth 8: Children Can’t Make IRA Contributions

Fact: Children can contribute to an IRA if they meet certain requirements. The custodial IRA or “IRA for kids” lets you or another adult open an IRA, for which you act as custodian until the child turns 18.

“There is no minimum age requirement for opening a custodial Roth IRA,” said Judson Meinhart, director of financial planning at Modera Wealth Management. “Instead, the main barrier has to do with income. The child must have earned income from work, such as from a part-time job, babysitting, lawn mowing, or other employment.” 

Important

The income needs to be documented (you can create a simple record or receipt) for tax purposes.

“Saving for retirement might not be top of mind for your teenager,” said Meinhart. But it doesn’t mean you can’t help them along. “As an added bonus, parents or others can contribute on behalf of the child, as long as the total contributions don’t exceed the child’s earned income or the annual limit.”

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

Fact: This misconception likely stems from outdated rules. The SECURE Act passed in 2019, removed the age limit for contributing to a traditional IRA (previously age 70½). Now, you can keep saving beyond this age, as long as you have earned income and stay within the annual contribution limits.

This change aligns traditional IRAs with Roth IRAs, which have never had an age limit for contributions. Keep in mind that RMDs still apply to traditional IRAs, even if you’re still contributing when they take effect.

Myth 10: You Can Leave Your Money in an IRA Indefinitely

Fact: “Saving to your IRA or 401(k) is a great way to defer taxes on your contribution and investment growth, but you won’t be able to avoid those taxes forever,” said Meinhart. In other words, you can’t keep retirement funds in your account indefinitely. 

Many retirement accounts, including IRAs and 401(k)s, are subject to required minimum distributions (RMDs). Currently, RMDs must begin at age 73 for individuals born between 1951 and 1959 and at age 75 for those born in 1960 or later.

To calculate RMDs, divide your IRA’s year-end value by a distribution period based on your age, using the IRS’s Uniform Lifetime Table. Your beneficiaries are also subject to RMD rules. A spouse can treat the inherited IRA as their own and follow the same RMD rules. Non-spouse beneficiaries, like your children, usually must withdraw the full account balance within 10 years of your passing.

“If you’re passing on a large IRA balance,” Meinhart noted, “it has the potential to propel your beneficiaries into significantly higher tax brackets, meaning more of their inheritance will be lost to taxes. This is where thoughtful, multi-generational tax planning can help preserve wealth and steer more of it towards its intended beneficiaries.”

What Is the Main Disadvantage of a Traditional IRA?

The main drawback of a traditional IRA is that even though contributions are tax-deductible upfront, withdrawals in retirement are taxed, which can significantly impact your income. While the contribution limits are lower compared to some employer plans and early withdrawals come with penalties, a traditional IRA can still be a useful tool for retirement savings.

Why Is My Traditional IRA Losing Money?

Market volatility is often the main culprit since IRAs typically invest in stocks, bonds, and mutual funds. Short-term losses are a normal part of the investment cycle. Other reasons your traditional IRA might be losing money include: 

• Economic factors like downturns, interest rate changes, geopolitical events, and industry-specific challenges
• Poor investment decisions, like choosing overly aggressive or risky investments, lack of diversification, or putting money into underperforming sectors
• High fees, including account maintenance and management costs
• Withdrawing during market downturns 
• Making non-qualified distributions that incur a tax penalty
• Irregular contributions that result in missed growth opportunities

What Is the 5-Year Rule for Traditional IRAs?

The 5-year rule applies to Roth IRAs, not traditional IRAs. The 5-year aging rule for Roth IRAs requires that five years must pass from your first contribution before you can withdraw earnings without taxes or penalties. 

Once the 5-year rule is satisfied and you are 59½ or older, you can withdraw earnings tax- and penalty-free. This rule applies to all Roth IRAs, including inherited ones, even if you’re already over 59½ when you open the IRA.

You can shorten the 5-year aging requirement by contributing for the prior tax year before the current tax filing deadline. For example, if you make a contribution in April for the prior year, the 5-year countdown begins from that date. This means you could access your earnings in just over three years.

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

Yes, you can simultaneously have a traditional IRA and 401(k). For 2024, you can contribute up to $23,000 to your 401(k), plus an extra $7,500 if you’re 50 or older. For 2025, the 401(k) contribution limit increases to $23,500, plus the same $7,500 catch-up limit if you’re between the ages of 50 and 59 or 64 and above. Starting in 2025, if you’re between the ages of 60 and 63, you can make a catch-up contribution of $11,250 instead of $7,500. 

The contribution limit for a traditional IRA is $7,000, with an additional $1,000 catch-up contribution for those 50 and older in 2024 and 2025. However, the tax deductibility of your traditional IRA contributions may be limited if you have a 401(k). You can deduct the full IRA contribution if your income is below a certain threshold. As your income rises, the ability to deduct decreases. Once your income reaches a certain level, you cannot deduct your IRA contributions at all.

The Bottom Line

Understanding some basic facts about IRAs helps you plan better for retirement. By clearing up common misconceptions, you can make smarter choices about your contributions, withdrawals, and strategy. 

Whether you’re a high earner or just starting out, you can still use a traditional IRA with other retirement accounts to save more. Just be aware of things like tax deductions and required minimum distributions. Talk to a financial advisor or check the IRS website for advice that fits your situation for the latest rules.