Retirement Planning: What is a Traditional IRA?

Words by Abbie Dyer on Apr 20, 2015 10:00:00 AM

What’s the first thing you do when you have some extra cash? Many of us want to run to the store and stock up on groceries, clothes or the latest electronics when we see a higher balance in our accounts. Fulfilling our present needs often takes precedence over the future. We know what we want now, but how can we tell what we’ll want and need in the future? 

There’s really no way to tell where life will take you, but you can set goals for where you hope to be someday. Finding an investment vehicle that correlates with your needs is an important part of reaching those goals. One popular way to save for life after your working career is the Traditional IRA

 

What is a Traditional IRA?

This plan is similar to a 401(k) in that your dollars are invested pre-tax, meaning your earnings are not taxed until withdrawn. Anyone under age 70½ who earns an eligible income can contribute to a Traditional IRA. If you qualify, you can get tax deductions and credits when you put money into your IRA. Remember that the money in your IRA is separately insured from your savings account up to $250,000.

 

What Are the Benefits of a Traditional IRA?

You're in control of your money and you can decide where you want to invest. You might decide to be more conservative, or you can choose to invest your money more aggressively in stocks, bonds, mutual funds and annuities. This plan might work in your favor because your contributions can reduce the amount of your taxable income. 

 

What Else Should I Know About Traditional IRAs?

If you withdraw any funds from a Traditional IRA before age 59½, you’ll be subject to a 10% excise tax in addition to regular income taxes. Exceptions to some tax penalties include: 

  • Death
  • Disability
  • First time home purchase
  • Deductible medical expenses.

Keep in mind that you can make withdrawals from a Traditional IRA at any time once you reach age 59½. But by age 70½, withdrawals from a Traditional IRA are required. You'll pay taxes when you do a withdrawal during retirement. Don't worry too much, your tax rate may be lower when you retire due to the possibility of being in a different tax bracket.

Planning for the future doesn’t have to be a huge headache. The first step to achieving financial peace is being proactive about saving and investing. With an IRA, you can set up payroll deductions to fund your account and you'll save up a ton of money before you even realize it. 

 


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SEE ALSO: Retirement Planning: What is a Roth IRA?

 

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