What is the tax status of contributions made to a Traditional IRA?

Contributions made to a Traditional IRA are considered tax-deductible in the year they are made, meaning individuals can deduct these contributions from their taxable income, reducing their overall tax burden for that year. This tax benefit applies as long as certain income limits are met and the individual does not have access to an employer-sponsored retirement plan.

However, when funds are eventually withdrawn from the Traditional IRA during retirement, those distributions are taxed as ordinary income. This mechanism allows for tax deferral on earnings and contributions until retirement when individuals may be in a lower tax bracket. This is a fundamental feature of a Traditional IRA, making it a popular choice for retirement savings.