A Traditional Individual Retirement Account (IRA) is a type of retirement savings account in the United States that offers tax advantages to encourage individuals to save for retirement. Here are some key features:
- Pre-Tax Contributions: Contributions to a Traditional IRA are typically made with pre-tax dollars. This means that the money you contribute can be deducted from your taxable income in the year you make the contribution, reducing your current tax bill.
- Tax-Deferred Growth: The funds in the account grow tax-deferred. This means that you do not pay taxes on the investment earnings and growth within the account until you start withdrawing the funds.
- Taxes Upon Withdrawal: When you start withdrawing the funds at retirement (you can start at age 59 ½ without penalty), the withdrawals are taxed as ordinary income.
- Required Minimum Distributions (RMDs): Once you reach age 72, you must begin taking required minimum distributions from your Traditional IRA, whether you need the money or not.
- Penalties for Early Withdrawal: If you withdraw money from your Traditional IRA before you reach age 59 ½, you typically will be subject to a 10% early withdrawal penalty in addition to regular income taxes, although there are some exceptions for specific circumstances like first-time home purchase, education expenses, or serious illness.
- Contribution Limits: The maximum you can contribute to a Traditional IRA in a year is $6,000, or $7,000 if you're age 50 or older. However, these limits are subject to periodic adjustments for inflation, so they may be different now.
- Income Limits for Tax Deduction: While anyone with earned income can contribute to a Traditional IRA, the ability to deduct those contributions on your taxes is phased out at higher income levels if you or your spouse also have a retirement plan at work.
Remember to always consult with a financial advisor or do your own research to stay updated with the most recent rules and regulations.
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