A traditional IRA (Individual Retirement Account) is a retirement savings account that allows individuals to contribute pre-tax income, which can then grow tax-deferred until withdrawals are made, typically during retirement. Here are the key features:
- Contributions may be tax-deductible, reducing your taxable income in the year you contribute.
- Investments grow tax-deferred, meaning you do not pay taxes on earnings and gains until you withdraw the money.
- Withdrawals during retirement are taxed as ordinary income.
- If you withdraw before age 59½, you usually face income tax plus a 10% penalty, except for certain exceptions.
- There are annual contribution limits, which for 2024 and 2025 are $7,000 for those under 50 and $8,000 for those 50 and older.
- There is no age limit for making contributions as long as you have earned income.
- Required minimum distributions (RMDs) must start by April 1 of the year after you turn 73.
- A traditional IRA can be a good option if you expect to be in the same or lower tax bracket during retirement.
In comparison to a Roth IRA, traditional IRA contributions are tax-deductible upfront, and withdrawals are taxed; Roth IRA contributions are made with after-tax money, but withdrawals can be tax-free under certain conditions. Overall, a traditional IRA offers immediate tax benefits and tax-deferred growth to help individuals save for retirement effectively. This summary is based on comprehensive information about traditional IRAs and their rules from reputable financial and IRS sources.
