Traditional IRA: An Overview of the Basics
Individual Retirement Accounts (IRAs) are a popular way to save for retirement. A Traditional IRA is one type of IRA that allows you to contribute pre-tax dollars, which can help reduce your tax bill today. This type of account can be a valuable tool for those looking to save money for retirement.
The contribution limit in 2021 is $6,000 per year ($7,000 if you’re age 50 or older). You have until April 15th of the following year to make contributions for the previous year. The contribution limits are subject to change each year due to inflation.
One key feature of a Traditional IRA is that it allows your earnings and gains to grow tax-deferred until you withdraw them during retirement. Once you reach age 59½, withdrawals are penalty-free but still subject to income taxes as ordinary income.
It’s important to note that there are some restrictions on who can contribute fully deductible amounts based on their modified adjusted gross income (MAGI). For example, if you’re covered by an employer-sponsored retirement plan such as a 401(k), your ability to deduct contributions may be phased out based on your MAGI.
Another benefit of a Traditional IRA is that it offers flexibility when it comes time to take withdrawals during retirement. You can choose how much and when you want to take distributions from your account once you reach age 72 (with some exceptions). Keep in mind that after age 72, required minimum distributions must begin.
In summary, Traditional IRAs offer several advantages including tax-deferred growth potential and flexibility in taking distributions during retirement. It’s important however, before opening any new investment accounts or making any changes with existing ones, talk with a financial professional who understands both what options may best suit individual needs as well as understanding applicable rules and regulations related this type of investment account.