A Traditional IRA (Individual Retirement Account) is a type of retirement savings plan that is available in the United States. It allows individuals to save money for retirement with tax-deferred growth, meaning that you don’t pay taxes on the earnings and gains of your investments until you withdraw the money. Here are some key points about Traditional IRAs:
- Pre-tax Contributions: Contributions to a Traditional IRA may be tax-deductible depending on your income, filing status, and whether you (or your spouse, if filing jointly) are covered by a retirement plan at work. This means that the money you contribute could be deducted from your taxable income for the year you make the contribution.
- Taxes Upon Withdrawal: When you withdraw money from your Traditional IRA during retirement, the distributions are treated as taxable income. If you take distributions before the age of 59½, you may also be subject to an additional 10% early withdrawal penalty, unless an exception applies.
- Required Minimum Distributions (RMDs): Starting at age 72 (or 70½ if you were 70½ before January 1, 2020), account holders are required to start taking RMDs, which are minimum amounts that must be withdrawn each year based on life expectancy tables provided by the IRS.
- Contribution Limits: The IRS sets annual contribution limits for Traditional IRAs. These limits can change from year to year and may be affected by the individual’s age (those 50 or older can make additional catch-up contributions).
- Investment Options: Within a Traditional IRA, you can choose from a variety of investment options, including stocks, bonds, mutual funds, and other investment vehicles, depending on what the institution where you open your IRA offers.
- Tax Diversification: A Traditional IRA can provide tax diversification in retirement. Since you have already paid taxes on contributions to Roth accounts and will pay taxes on distributions from Traditional IRAs, having both types of accounts allows you to manage your tax liability more effectively in retirement.
- Income Eligibility: There are no income limits for contributing to a Traditional IRA, but there are limits for deducting your contributions on your tax return if you or your spouse is covered by a retirement plan at work.
The specific details of a Traditional IRA, including contribution limits, tax benefits, and other rules, can change with tax laws, so it’s important to consult the IRS website or a financial advisor for the most current information.