Basic Rules of the Traditional IRA

Individual retirement accounts offer a great opportunity for individuals and married couples to start their retirement savings today. There are many different types of IRAs, each with their own benefits and drawbacks. It is important to understand how each type of IRA works to pick the type of account that will best meet your current and future needs. Here we look at the traditional IRA which is a popular personal savings plan and the basic rules of this type of account.

Rules of the Traditional IRA

What is a traditional IRA?

A traditional IRA is a saving plan that offers the owner of the account the opportunity to set money aside for retirement while enjoying certain tax advantages. The traditional IRA is one of the two most popular savings accounts utilized by individuals and their spouses. The other is the Roth IRA which is similar but still has distinct differences.

Tax advantages of the traditional IRA.

For many people, the best aspect of contributing to a traditional IRA is the fact that contributions can grow tax-free until the time of withdrawal. This means that when you meet certain income requirements, all or part of your contributions to your IRA can be considered as a tax deduction when filing your income tax return. This will reduce your tax liability at the time of contributions. This advantage does not come without a cost however as eventually (at the time of distribution) the owner of the account will have to pay taxes on money set aside for retirement.

Contribution rules for a traditional IRA.

To establish and contribute to a traditional IRA, the owner of the account must make contributions from taxable income. This can include wages, salaries, bonuses, commissions and self employment. Some things that would not qualify include royalties, rental income or earnings from investments. There are limits to the amount of money you can contribute annually which are determined by income and filing status. For most people, all or part of the contributions will be considered a tax deduction.

Distribution rules for the traditional IRA.

Before you establish and contribute to an IRA it is important to understand the distribution rules. This is important regardless of what type of retirement account you open as it can determine how much money your earn or lose at the time of contribution. IRAs are designed for long term savings and as a result, they are set up to discourage early distribution. To avoid extra fees, you should avoid taking money from a traditional IRA before the age of 59 1/2. This is the earliest age when earnings or contributions can be distributed. Distributions must be made by once you reach the age of 70 1/2 or you risk losing a hefty sum to the IRS for not making minimum distributions.

Anyone who is considering a personal savings account should research all of the options available to them before making a final decision. The traditional IRA is an excellent tool to save money toward retirement and understanding all of the rules in advance will allow you to reap the most rewards from this type of savings strategy.

Where to Open a Traditional IRA

Need to open an IRA? Here are review posts on your options as well as links to open an account:

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