A Traditional IRA is primarily designed to help individuals save and invest for retirement while providing unique tax benefits.
One of the hallmark features of a Traditional IRA is the tax treatment it offers.
Contributions to a Traditional IRA are typically made with pre-tax dollars, meaning the money you contribute is not immediately subject to income tax, which can potentially lower your current tax liability.
Within a Traditional IRA, your investments can grow tax deferred. This means you won’t pay taxes on the capital gains, dividends, or interest earned on your investments until you withdraw the money in retirement.
When you retire and start taking money out of your Traditional IRA, the withdrawals are considered as taxable income. However, you may be in a lower tax bracket during retirement, which could mean paying less in taxes than you would while working.
To open and contribute to a Traditional IRA, you typically need to have earned income (e.g., wages or self-employment income). There are no income limits for contributing to a Traditional IRA, but there can be limits on deductibility if you or your spouse has access to a workplace retirement plan.
Traditional IRA contributions are subject to annual limits set by the IRS, which may vary based on age and other factors.
Traditional IRA withdrawals can generally be made penalty-free after age 59½, but they are subject to income tax. Early withdrawals may incur a 10% penalty.
Traditional IRAs have required minimum distributions (RMDs) starting at age 72, which means you must start taking money out, and these withdrawals are taxable.
Traditional IRAs offer a wide range of investment options, allowing you to choose from various assets like stocks, bonds, mutual funds, and more.
Traditional IRAs can be part of an estate planning strategy, but they come with rules and tax considerations for beneficiaries.