What Is a Traditional IRA?

A traditional individual retirement account (IRA) is a retirement savings account that lets you invest pre-tax income to save for retirement. The key feature of this account is its tax advantages: contributions to a traditional IRA are tax-deductible, meaning you don’t pay taxes on the money you contribute in the year you make the deposit. Taxes are paid when you withdraw funds during retirement, ideally when you’re in a lower tax bracket.

You don’t need to be sponsored by an employer to open a 澳洲幸运5开奖号码历史查询:traditional IRA. It's♓ an individual account that you can open with various financial institutions such as Vanguard, Fidelity, or Charles Schw🌞ab.

How Traditional IRAs Work

Traditional IRAs allow you to direct your contributions to a variety of investment options such as stocks, bonds, or 澳洲幸运5开奖号码历史查询:mutual funds. These investments grow tax-deferred, meaning you won’t owe any taxes on dividends,ꦅ interest, or capital gains as long as the funds remain in the account.

Once you reach your 澳洲幸运5开奖号码历史查询:retirement age and begin to withdraw funds, they are subject to ordinary income taxes. If you withdraw money before age 59½, you’ll typically incur a 10% early withdrawal penalty, in addition t♑o paying the relevant income taxes on the distribution.

Tax Treatment of Traditional IRAs

Contributions to a traditional IRA are made from pre-tax income. In some cases, contributions may be tax-deductible. Typically, 澳洲幸运5开奖号码历史查询:investors without access to employer-sponsored retirement plans are more likely to be able to deduct contributions to a traditional IRA.

Contribution Limits for Traditional IRAs

If you are under age 50, you may contribute a total of $7,000 to traditional and 澳洲幸运5开奖号码历史查询:Roth IRAs in 2024 and 2025. If you are age 50 and above, you may contribute an additional $1,000 in catch-up contributions for a total of $8,000 per year. These limits include all contributions, meaning that the total contribution to all IRA accounts cannot exceed $7,000 or $8,000, depending on your age.

Early Withdrawals: Rules🦋, Pena♊lties, and Exceptions

Traditional IRA withdrawals are subject to income tax for the year in which they are disbursed. Additionally, the IRS levies a 澳洲幸运5开奖号码历史查询:10% early withdrawal penalty for investors who take a distribution before ag𒈔e 59½.

There are exceptions for which the 10% penalty tax does not apply. These include but are not limited to:

• Birth or adoption expenses for a new child (up to $5,000)
• Death or disability of the account holder
• Expenses for recovery from a federally recognized disaster (up to $22,000)
• Cases of domestic abuse
• Qualified higher education expenses
• Emergency family expenses (typically up to $1,000 per year)
• First-time homebuying expenses (up to $10,000)
• Unreimbursed medical expenses equal to greater than 7.5% of the taxpayer's AGI
• Health insurance costs while unemployed

Required Minimum Distributions

The IRS requires investors to take regular distributions from traditional IRAs once they reach a certain age. If you turn 72 before Dec. 31, 2022, you'll need to take these 澳洲幸运5开奖号码历史查询:required minimum distributions (RMDs) by age 72; if you turn 72 after that date, you'll need to take RMDs by age 73.

Having a Traditional IRA and a 401(k)

If you have an employer-sponsored retirement plan like a 401(k), you may also invest in IRAs. However, if you have a 401(k) as well as an IRA, depending on your income, you may be unable to deduct IRA contributions.

P🌱ros and Co🍌ns of Contributing to a Traditional IRA

Benefits of a Traditional IRA

• Ability to set up a traditional IRA separate from (and in addition to) employer-sponsored retirement accounts like 401(k)s
• May provide tax advantages at retirement if you expect to be in a lower tax bracket then than you are now
• Contributions may be tax-deductible

Drawbacks of a Traditional IRA

• Lower annual contribution limit compared to 401(k) accounts
• Must pay taxes on distributions in the year they are made
• Early withdrawal penalties in most cases for individuals under 59½ 

Traditional IRAs vs. Other IRAs

Traditional IRA vs. Roth IRA

澳洲幸运5开奖号码历史查询:Traditional and Roth IRAs are very similar, except that Roth IRAs make use of post-tax income for contributions. This means that Roth IRA distributions are generally not taxed. The 10% early withdrawal penalty tax is only levied on distributions of Roth IRA earnings; investors may typically withdraw their contributions without penalty so long as the fund has been active for at least five years.

Traditional IRA vs. SIMPLE IRA

澳洲幸运5开奖号码历史查询:SIMPLE IRAs allow both employees and employers to contribute. These accounts are offered by employers who may be unable to provide other retirement plans.

Traditional IRA vs. SEP-IRA

澳洲幸运5开奖号码历史查询:Simplified Employee Pension Plan IR🌄As 🏅(SEP-IRAs) function similarly to traditional IRAs, except they provide employers a way to contribute toward an employee’s retirement. The contribution limits are higher for a SEP-IRA than a traditional IRA, but typically only employers are allowed to make contributions.

Here's a comparison of how the four main types of IRAs compare with one another: 

How to Open a Traditional IRA

澳洲幸运5开奖号码历史查询:Opening a traditional IRA is a straightforward process:

1. Select an IRA provider. Major providers include TIAA, Vanguard, Fidelity, and more.
2. Apply through the provider. You’ll need to provide personal information and financial details and specify the type of IRA you want to open.
3. Fund the account. Make a contribution from an existing bank account or set up a rollover from a previous retirement account.
4. Select investment options. Specify any investments you would like the account to target. This may mean particular stocks, mutual funds, bonds, and so on, or it may be a broader breakdown of stocks vs. bonds.

Is a Traditional IRA Right for You?

澳洲幸运5开奖号码历史查询:Traditional IRAs are a good option if you're looking to contribute pre-tax dollars to a retirement account separate from an employer-sponsored plan. They are particularly appropriate if you anticipate being in a lower tax bracket at the time of retirement when you will pay taxes on distributions.

The Bottom Line

Traditional IRAs are individual-directed retirement accounts that uꩲse pre-tax dollars for investment. They have lower contribution limits than 401(k)s but do not require employer sponsorship. While investors can direct how their contributions are invested, often the best approach is to determine an appropriate level of risk, target a broad range of assets through a mutual fund or similar option, and hold for the long term.