Retirement may seem far off when you arrive in the United States, but the reality is striking: according to the U.S. Department of Labor, only 38% of Hispanic workers have access to an employer-sponsored retirement plan, compared to 54% of non-Hispanic white workers. This gap makes understanding individual savings options critical for your financial future.
The traditional IRA (Individual Retirement Account) is a powerful tool that many Hispanics are unaware of or underutilize. This savings vehicle allows you to reduce your taxes today while building wealth for tomorrow, but it requires understanding its rules, limits, and strategies to make the most of it.
In this article, you will find detailed information on how a traditional IRA works, who can open one, how much you can contribute, how to choose the right investments, and what mistakes to avoid. Everything is explained with the specific needs of Hispanic workers in the United States in mind.
What is a Traditional IRA and How Does It Work?
A traditional IRA is a tax-advantaged savings account specifically designed for retirement. Unlike a regular savings account, the money you deposit into a traditional IRA can reduce your taxable income for the current year, meaning you pay less in taxes now.
The money inside the account grows tax-free until you withdraw it during retirement. At that point, you will pay taxes on the withdrawals as ordinary income. The premise is simple: most people have lower incomes during retirement than during their working years, so they will end up paying less in taxes overall.
According to the Internal Revenue Service (IRS), anyone who has earned income (taxable compensation) can contribute to a traditional IRA, regardless of their income level. You can open an account at banks, credit unions, mutual funds, or brokerage firms. You do not need to be a U.S. citizen; if you work legally in the United States and file taxes, you can open a traditional IRA.
The account is yours, not your employer's. This means you take it with you no matter how many times you change jobs, which is especially valuable for Hispanic workers who frequently change employers or are self-employed.
Contribution Limits for 2024 and 2026
The IRS sets annual limits on how much you can contribute to a traditional IRA. For the 2024 tax year, the contribution limit is $7,000 if you are under 50 years old. If you are 50 or older, you can make an additional "catch-up contribution" of $1,000, for a total of $8,000.
These limits apply to the combined total of all your traditional IRA and Roth IRA accounts. If you have both types of accounts, your total contributions cannot exceed $7,000 (or $8,000 if you are 50 or older).
For 2026, although the IRS has not yet published the official limits at the time of writing this article, historically these amounts are adjusted for inflation in increments of $500. It is likely that we will see limits of $7,500 for those under 50 and $8,500 for those 50 and older, but you should check the official figures at www.irs.gov/es when they are published.
You have until April 15 of the following year to make contributions that count for the previous tax year. For example, you can make contributions for the 2024 tax year until April 15, 2025. This flexibility is helpful if you receive a tax refund or a bonus early in the year.
Tax Advantages of a Traditional IRA
The main advantage of the traditional IRA is the tax deduction. When you contribute to a traditional IRA, that money may be deductible from your taxable income, reducing your tax bill for the current year.
For example, if you earn $50,000 a year and contribute $5,000 to your traditional IRA, you will only pay taxes on $45,000. If you are in the 22% tax bracket, that contribution saves you $1,100 in taxes that year.
However, there are limits to this deduction if you or your spouse are covered by a retirement plan at work (like a 401(k)). For 2024, if you file as single and are covered by a plan at work, your deduction begins to phase out when your modified adjusted gross income (MAGI) exceeds $77,000 and is completely phased out at $87,000.
For married couples filing jointly, if the spouse making the contribution is covered by a plan at work, the phase-out begins at $123,000 and is completed at $143,000. If you are not covered by a plan at work but your spouse is, the phase-out begins at $230,000 and ends at $240,000.
In addition to the initial deduction, all growth within your traditional IRA (interest, dividends, capital gains) is tax-protected until you withdraw the money. This allows your money to grow faster through compound interest, as you do not lose a portion each year to taxes.
Eligibility Requirements to Open a Traditional IRA
The requirements to open a traditional IRA are surprisingly simple. You only need to have earned income during the tax year. This includes wages, tips, commissions, bonuses, self-employment income, and taxable alimony.
Investment income (interest, dividends, capital gains), pension or annuity income, Social Security income, or rental property income do not qualify as compensation unless you materially participate in the business.
There is no upper age limit for contributing to a traditional IRA, thanks to the SECURE Act of 2019. Previously, you could not contribute after age 70½, but that restriction no longer exists. As long as you have earned income, you can contribute.
For immigrants, you do not need to be a U.S. citizen or have a green card. If you work legally in the United States and have a Social Security number or an Individual Taxpayer Identification Number (ITIN), you can open a traditional IRA. The key is that you must file a tax return in the United States.
Undocumented workers who use an ITIN and file taxes can also open a traditional IRA, although not all financial providers accept ITINs. Institutions like Vanguard, Fidelity, and Charles Schwab generally accept applications with ITINs.
Where to Open Your Traditional IRA Account
You have multiple options for where to open your traditional IRA, and your choice will affect the investment options available and the fees you will pay.
Banks and Credit Unions: They offer IRAs with limited investment options, typically certificates of deposit (CDs) or savings accounts. They are safe options but with low returns, generally between 0.5% and 4% annually. They are appropriate if you are close to retirement and want to preserve capital without risk.
Brokerage Firms: Companies like Fidelity, Vanguard, Charles Schwab, and TD Ameritrade offer IRAs with a wide range of investment options: individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. Most have eliminated commissions for stock and ETF trades. They are ideal if you want control over your investments and the potential for greater growth.
Robo-Advisors: Platforms like Betterment, Wealthfront, and M1 Finance offer automated investment management. They automatically build and rebalance a diversified portfolio based on your age and risk tolerance. They charge low annual fees (typically 0.25%-0.50%) and are excellent for beginners who do not want to make active investment decisions.
Mutual Fund Companies: Firms like Vanguard, Fidelity, and T. Rowe Price offer IRAs focused on their own mutual funds. If you prefer a passive approach with low-cost index funds, these are great options.
When choosing, consider the fees, minimum balance requirements, available investment options, and customer service in Spanish. Many large firms like Fidelity and Charles Schwab offer customer service in Spanish, which can be valuable when getting started.
Investment Strategies Within Your Traditional IRA
Once your account is open, the next crucial step is to choose how to invest the money. Leaving it in cash is a common mistake that severely limits your long-term growth.
Target-Date Funds: These funds automatically adjust the investment mix based on your expected retirement date. If you plan to retire around 2050, you would buy a "2050 Target-Date Fund." They start with more stocks (more risk, more growth potential) when you are far from retirement and gradually shift to more bonds (less risk, more stability) as you approach retirement. They are the simplest and most appropriate option for beginners.
Index Funds: These funds replicate market indices like the S&P 500. They offer instant diversification and extremely low fees. For example, Vanguard's VFIAX fund has a fee of only 0.04% annually. A simple approach is to split your money between a total U.S. stock market index fund (70-80%) and a bond index fund (20-30%), adjusting the percentage based on your age and risk tolerance.
General Asset Allocation Rule: A traditional formula suggests subtracting your age from 110 to determine the percentage you should have in stocks. If you are 35 years old, this suggests 75% in stocks and 25% in bonds. This rule is just a starting point; adjust according to your personal situation.
International Diversification: Consider including international funds (15-25% of your portfolio) for exposure to markets outside the United States. Funds like VXUS (Vanguard Total International Stock ETF) offer global diversification.
Rebalancing: At least once a year, review your portfolio and adjust to maintain your target allocation. If stocks have risen significantly and now represent 85% instead of the 75% you planned, sell some and buy more bonds. Within an IRA, these transactions do not generate taxes.
Key Differences Between Traditional IRA and Roth IRA
Many Hispanic workers confuse the traditional IRA with the Roth IRA. Both are retirement accounts with tax advantages, but they operate in opposite ways.
Tax Treatment: With a traditional IRA, you get a tax deduction now, but you pay taxes on withdrawals in retirement. With a Roth IRA, you contribute money after taxes (without an immediate deduction), but qualified withdrawals in retirement are completely tax-free.
Income Limits: Anyone with earned income can contribute to a traditional IRA. However, the Roth IRA has income limits. For 2024, if you are single and earn more than $161,000, you cannot contribute directly to a Roth IRA. For married couples filing jointly, the limit is $240,000.
Required Minimum Distributions (RMDs): With a traditional IRA, you must start withdrawing money (and paying taxes) at age 73, even if you don’t need the money. The Roth IRA has no RMDs during your lifetime, offering more flexibility.
Early Withdrawals: With a Roth IRA, you can withdraw your contributions (not the earnings) at any time without penalty or taxes, since you have already paid taxes on that money. With a traditional IRA, withdrawals before age 59½ generally incur a 10% penalty tax, in addition to regular income taxes.
Which to Choose? If you expect to be in a higher tax bracket during retirement or if you are young and have decades for the money to grow, the Roth IRA may be better. If you need the tax deduction now or expect to be in a lower tax bracket in retirement, the traditional IRA makes more sense. Many people contribute to both types of accounts for tax diversification.
Withdrawal Rules and Required Minimum Distributions
Understanding when and how you can withdraw money from your traditional IRA is crucial to avoid costly penalties.
Withdrawals Before Age 59½: Generally, if you withdraw money from your traditional IRA before you turn 59½, you will pay regular income taxes plus an additional 10% penalty. This penalty exists to discourage the use of retirement funds for non-retirement expenses.
However, there are important exceptions to the 10% penalty. You can withdraw without penalty (though you will still pay income taxes) for:
- Medical expenses that exceed 7.5% of your adjusted gross income
- Health insurance premiums if you are unemployed
- Qualified higher education expenses for yourself, your spouse, children, or grandchildren
- Up to $10,000 for the purchase of your first home (lifetime limit)
- Permanent disability
- Substantially equal payments based on your life expectancy (72(t) Rule)
Withdrawals After Age 59½: Once you turn 59½, you can withdraw as much or as little as you want without penalty. You will only pay regular income taxes based on your current tax bracket.
Required Minimum Distributions (RMDs): Starting in the year you turn 73 (up from 72 years due to the SECURE 2.0 Act), you must begin withdrawing a minimum amount each year. The amount is calculated by dividing your account balance by a life expectancy factor set by the IRS.
For example, if you have $500,000 in your IRA at age 73, your RMD for that year would be approximately $18,868 (using the uniform distribution factor of 26.5). If you do not withdraw the full RMD, you face a severe penalty: 25% of the amount you should have withdrawn but did not.
You can find more information about RMDs on the IRS website.
How to Maximize Contributions on a Limited Budget
For many Hispanic workers, contributing the maximum of $7,000 a year seems impossible. However, any amount you contribute is valuable and grows over time thanks to compound interest.
Start with What You Can: If you can only contribute $50 a month ($600 a year), do it. That $600 invested at an average return of 8% will grow to approximately $39,000 after 25 years. If you wait until you have "enough" money, you will never start.
Automatic Increases: Set up automatic contribution increases. Many financial institutions allow you to schedule annual automatic increases, say 1% of your income each year. You will hardly notice the change, but you will significantly accelerate your savings.
Contribute Tax Refunds: If you receive a tax refund, consider depositing part or all of it into your IRA. According to IRS data, the average refund exceeds $3,000, which could cover almost half of the maximum annual contribution.
Cut Unnecessary Expenses: Review your budget to find an extra $20-$30 a week. This could mean making coffee at home instead of buying it, canceling subscriptions you don’t use, or cutting back on streaming services. Those $100 saved monthly equate to $1,200 annually for your retirement.
Contributions from Bonuses or Extra Income: If you receive a bonus at work, an inheritance, or income from a side job, consider directing that money straight to your IRA before it gets integrated into your regular budget.
Take Advantage of Tax Season: Remember that you have until April 15 to make contributions that count for the previous tax year. If you receive a refund in March or April, you can use it to contribute for the year that just ended.
401(k) to Traditional IRA Conversions
If you leave a job where you had a 401(k), you have several options regarding what to do with that money. One of the most popular is to do a rollover to a traditional IRA.
Advantages of Rolling Over to an IRA: IRAs generally offer more investment options than 401(k) plans, which often limit you to 10-20 specific funds. Fees in IRAs also tend to be lower. Additionally, consolidating multiple employer retirement accounts into a single IRA simplifies tracking and management.
Direct Rollover Process: The safest method is a direct rollover, where your former employer transfers the money directly to your new IRA. This avoids the money passing through your hands, which could trigger tax consequences. Contact the financial institution where you plan to open your IRA; they usually handle all the paperwork.
Avoid Indirect Rollovers: In an indirect rollover, the check is made out to you, and you have 60 days to deposit it into an IRA. If you don’t do it within that timeframe, the entire amount is considered a taxable distribution and could be subject to penalties. Additionally, your employer must withhold 20% for taxes, complicating matters. Avoid this method if possible.
Converting a Traditional 401(k) to a Roth IRA: You can also convert your 401(k) to a Roth IRA, but you will pay taxes on the full amount in the year of the conversion. This only makes sense if you are in a low tax bracket that year or if you have cash available to pay the taxes without touching your retirement money.
Don’t Forget Old 401(k)s: According to a study by the Government Accountability Office, millions of Americans have forgotten retirement accounts from previous employers. Make sure to track all your accounts and consolidate them if it makes sense for your situation.
Common Mistakes to Avoid
Even with the best intentions, many workers make mistakes that significantly reduce the value of their traditional IRAs.
Mistake 1: Not Investing the Money: Opening the IRA is just the first step. If you leave the money in cash or a money market account with 0.5% returns, you lose decades of potential growth. Invest according to your time horizon and risk tolerance.
Mistake 2: Withdrawing Money Prematurely: Using your IRA as an emergency fund is costly. The 10% penalty plus taxes can reduce a $10,000 withdrawal to just $7,000 or less. Keep a separate emergency fund in a regular savings account.
Mistake 3: Not Considering Tax Implications: If all your retirement savings are in traditional accounts (traditional IRA, 401(k)), you will face a large tax bill during retirement. Consider diversifying with Roth savings to have more tax flexibility later.
Mistake 4: Contributing More Than Allowed: If you contribute more than the annual limit, the excess is subject to a 6% penalty each year it remains in the account. If you make this mistake, withdraw the excess before filing your tax return.
Mistake 5: Not Naming Beneficiaries: If you die without a designated beneficiary, your IRA goes through probate, which is costly and slow. Name primary and contingent beneficiaries, and update them after major life events (marriage, divorce, birth of children).
Mistake 6: Paying High Fees: Fees of 1-2% annually may seem small, but over 30 years, they can reduce your retirement balance by 20-30%. Look for low-cost index funds with fees below 0.20%.
Mistake 7: Not Taking Advantage of the Extended Contribution Window: Remember that you can contribute for the previous tax year until April 15. Many people miss this opportunity to contribute more.
Special Considerations for Self-Employed Workers
If you are self-employed or have a side business, you have additional options beyond the standard traditional IRA.
SEP IRA (Simplified Employee Pension): This type of IRA allows for much higher contributions than a regular traditional IRA. For 2024, you can contribute up to 25% of your net self-employment income, with a maximum of $69,000. This is ideal if you have high variable income and want flexibility year to year.
Contributions to a SEP IRA are tax-deductible, reducing your self-employment tax bill. The setup is simple, and administrative costs are minimal. However, if you have employees, you generally must contribute the same percentage of their compensation that you contribute for yourself.
SIMPLE IRA: If you have a small business with fewer than 100 employees, a SIMPLE IRA allows contributions of up to $16,000 in 2024 (plus an additional $3,500 if you are 50 or older). The employer must make an equivalent contribution or a fixed contribution of 2% of each employee's compensation.
Solo 401(k): For self-employed individuals without employees (other than a spouse), a Solo 401(k) offers even higher contribution limits, allowing employee and employer contributions that can reach up to $69,000 in 2024 ($76,500 if you are 50 or older).
Combined Strategy: You can have both a traditional IRA and a SEP IRA or Solo 401(k), but your total contributions to all plans must respect the combined limits set by the IRS.
For Hispanic workers with cleaning businesses, construction, landscaping services, food trucks, or any venture, these options provide powerful ways to reduce taxes while building wealth for retirement.
Advanced Tax Planning with Your Traditional IRA
Once you master the basics, there are more sophisticated tax strategies that can maximize the value of your traditional IRA.
Strategic Roth Conversions: If you have a year with unusually low income (due to unemployment, taking time off, or starting a business), consider converting part of your traditional IRA to Roth. You will pay taxes on the conversion, but at a lower rate than in normal years. The money then grows tax-free permanently.
Backdoor Roth: If your income is too high to contribute directly to a Roth IRA, you can contribute to a non-deductible traditional IRA and then immediately convert it to Roth. This requires careful attention to the "pro-rata rule" if you have other traditional IRAs, but it allows high-income individuals to gain Roth benefits.
Tax Bracket Management: Plan your retirement withdrawals to stay within lower tax brackets. For example, if you're close to the upper limit of the 12% bracket (around $89,000 for married couples in 2024), consider withdrawing just enough to remain within that bracket and cover additional expenses with Roth savings or taxable accounts.
Qualified Charitable Distributions (QCDs): Once you turn 70½, you can transfer up to $100,000 annually from your traditional IRA directly to qualified charities. This satisfies your RMD without increasing your taxable income, which is especially valuable if you don't need the RMD money.
Tax Withholding Strategy: When withdrawing money from your IRA, be cautious of automatic tax withholding. You can choose to have a specific percentage withheld or make quarterly estimated tax payments to avoid under-withholding.
Asset Protection and Beneficiaries
Your traditional IRA receives certain legal protections, but the rules vary based on your situation.
Creditor Protection: In the event of federal bankruptcy, IRAs are protected up to $1,512,350 (inflation-adjusted amount). Funds rolled over from an employer-qualified plan (like a 401(k)) generally have unlimited protection. However, state laws vary regarding creditor protection outside of bankruptcy.
Beneficiary Designation: Naming beneficiaries for your IRA is crucial. The money passes directly to your beneficiaries without going through probate, saving time and legal costs. You can name multiple beneficiaries and specify what percentage each one receives.
SECURE Act Rules for Beneficiaries: The SECURE Act of 2019 significantly changed the rules for non-spouse beneficiaries. Previously, they could "stretch" distributions over their lifetime. Now, most non-spouse beneficiaries must withdraw the entire IRA within 10 years after your death. Exceptions include spouses, minor children (until they reach adulthood), disabled beneficiaries, and beneficiaries who are no more than 10 years younger than you.
Spouses as Beneficiaries: Spouses have the most flexible options. They can treat the inherited IRA as their own, roll it over into their own IRA, or treat it as an inherited IRA. Generally, the best option is to treat it as their own, which delays RMDs until the surviving spouse turns 73.
Trusts as Beneficiaries: In complex situations (second marriages, beneficiaries with special needs, concerns about financial mismanagement), an estate planning attorney may recommend naming a trust as the beneficiary of the IRA.
When a Traditional IRA is NOT the Best Option
It's important to recognize that a traditional IRA is not the perfect solution for everyone. There are situations where other options might be better.
If your employer offers 401(k) matching: Always take full advantage of your employer's matching contributions in your 401(k) before contributing to an IRA. The match is free money, typically a 50-100% instant return. Only after maximizing the match should you consider contributing to an IRA.
If you're in a low tax bracket now: If you're currently earning little and are in the 10-12% tax bracket but expect to earn significantly more in the future, a Roth IRA is likely better. You'll pay low taxes on contributions now, and the money will grow completely tax-free.
If you need access to the money before retirement: Although there are exceptions to the 10% penalty, a traditional IRA is generally not suitable for money you might need in the next 5-10 years. Keep emergency funds and short-term savings in regular accessible accounts.
How to Select Life Insurance in the U.S.: If you're thinking about how to protect your family while saving for retirement, also consider the importance of life insurance. You can read more about this in our article on how to select life insurance in the U.S..
Rates and amounts are current as of publication date (September 2026). Fees, commissions, and minimums change without notice: always confirm the current amount on the provider's official website before making a decision.
Editorial Note: This article has been prepared with the assistance of artificial intelligence and supervised by Javier Valencia, founder of NewsTide and Computer Engineer. Verified data is distinguished from editorial opinions throughout the text. The external sources linked are independent of NewsTide.
Legal Disclaimer: This article is for informational and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any financial product. Consult with a certified financial advisor before making significant financial decisions. Past results do not guarantee future outcomes.
Editorial note: This article was produced with AI assistance and reviewed by Javier Valencia, founder of NewsTide and a Computer Engineer. Verified data is distinguished from editorial opinion throughout the text. External sources linked here are independent of NewsTide.
Disclaimer: This article is for informational and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any financial product. Consult a certified financial advisor before making significant financial decisions. Past performance does not guarantee future results.