By Team GICR. Updated: Apr 4, 2023 @ 10:38 am

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Video What Are Traditional IRAs?

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KEY TAKEAWAYS

A Traditional IRA allows individuals to make pre-tax contributions to a retirement account
At an age of 72 start taking annual distributions from the IRA, taxed as ordinary income
Traditional IRA are widely accepted and recognized by financial institutions
It is easy to find a custodian to manage the account

What Are Traditional IRAs?

You probably ask yourself “What are Traditional IRAs?” . We will do our best to answer this question in this article. A Traditional IRA (Individual Retirement Account) is a type of retirement savings account that allows individuals to make pre-tax contributions to a savings account that is set aside for retirement. The money in a Traditional IRA grows tax-deferred, meaning that no taxes are paid on the investment gains until the money is withdrawn at retirement.

Features of a Traditional IRA

Some key features of a Traditional IRA include:

Tax-deductible contributions: Contributions to a Traditional IRA are typically tax-deductible, which means that they can reduce the individual’s taxable income in the year the contribution is made.
Tax-deferred growth: Investment gains in a Traditional IRA grow tax-deferred, which means that no taxes are paid on the investment gains until the money is withdrawn at retirement.
Required Minimum Distributions: Once an individual reaches age 72, they are required to start taking annual distributions from their Traditional IRA, which are taxed as ordinary income.
Income limits: Tax-deductibility of contributions to a Traditional IRA may be limited or phased out based on the individual’s income level and participation in an employer-sponsored retirement plan.

Widely accepted

Contribution limits: The contribution limit for 2021 is $6,000 for individuals under age 50 and $7,000 for individuals 50 and over.
Widely accepted: Traditional IRA are widely accepted and recognized by financial institutions and it is easy to find a custodian to manage the account.

Overall, a Traditional IRA can be a good option for individuals looking to save for retirement and potentially reduce their taxable income in the short term. But it’s important to note that taxes will be due on the money withdrawn from the account in retirement. We hope this will contribute to answering your question “What are Traditional IRAs?” .

FAQ 1 about What Are Traditional IRAs: Where to start a Traditional IRA?

Traditional IRAs are offered by a variety of financial institutions including banks, credit unions, brokerage firms and insurance companies. Here are a few options of institutions than can answer the question “What are Traditional IRAs”:

Credit unions

Banks: Many large banks and regional banks offer Traditional IRA accounts. You can visit the website of your local bank or use an online search to find banks in your area that offer Traditional IRA accounts.
Credit unions: Many credit unions also offer Traditional IRA accounts. You can visit the website of your local credit union or use an online search to find credit unions in your area that offer Traditional IRA accounts.
Brokerage firms: Many brokerage firms such as Charles Schwab, Fidelity, E*TRADE, TD Ameritrade and Interactive Brokers offer Traditional IRA accounts. These firms typically offer a wide range of investment options, including stocks, bonds, and mutual funds.

Shop around

Insurance companies: Some insurance companies also offer Traditional IRA accounts, such as annuities. Be aware that annuities may carry some additional fees and charges, so be sure to review the terms and conditions carefully before investing.
Online platforms: Many online platforms like Bitcoin IRA, BitIRA, or Kingdom Trust also offer traditional IRA accounts. They will help you with the process and will guide you through it.

It’s important to shop around and compare the fees, investment options, and customer service of different traditional IRA providers before making a decision. Consider speaking to a financial advisor for more information and help on how to choose the best Traditional IRA for you. These are options to start with “What are Traditional IRAs?” .

FAQ 2 about What Are Traditional IRAs: Advantages

Some additional details on traditional IRA advantages include

Investment gains

Tax-deferred growth: Investment earnings in a traditional IRA grow tax-free until they are withdrawn. This means that any investment gains, dividends, or interest earned in the account will not be subject to taxes until the funds are withdrawn. This allows your money to compound more quickly over time, as you are not paying taxes on the growth of your investments.
Tax-deductible contributions: Contributions to a traditional IRA may be tax-deductible, depending on your income and whether you or your spouse are covered by a retirement plan at work. If you are not covered by a retirement plan at work, your traditional IRA contributions are always tax-deductible. However, if you are covered by a retirement plan at work, the deductibility of your traditional IRA contributions phases out as your income increases.
Wide range of investment options: Traditional IRAs offer a wide range of investment options, including stocks, bonds, mutual funds, and annuities. This allows you to diversify your portfolio and choose investments that align with your risk tolerance and investment goals.
No income limits: There are no income limits for contributing to a traditional IRA, so it can be a viable option for high-income earners as well. This means that regardless of how much you earn, you can still contribute to a traditional IRA and potentially benefit from the tax-deductible contributions.

Estate planning

Required Minimum Distributions: Traditional IRA owners must start taking distributions at age 72. This is a rule that the government put in place to ensure that people begin using the money they saved for retirement.
Potential for estate planning: Traditional IRA assets can pass to beneficiaries, which can be useful for estate planning purposes. If the account owner dies, the beneficiary can continue to defer taxes on the account’s earnings and take distributions over his or her own life expectancy. This can be a great way to pass on wealth to future generations.

FAQ 3 about What Are Traditional IRAs: Disadvantages

Traditional IRAs also have some disadvantages, including:

Disadvantages

Contribution limits: Traditional IRA contributions are limited to $6,000 per year for those under age 50 and $7,000 for those 50 and older. This means that if you want to save more for retirement, you may need to look into other options such as a 401(k) or a Roth IRA.
Required Minimum Distributions: As mentioned, traditional IRA owners must start taking distributions at age 72, which means that you must begin withdrawing money from the account even if you do not need it for living expenses. This can be problematic if you want to continue growing your account and leave it to your beneficiaries.
Taxable withdrawals: Withdrawals from a traditional IRA are taxed as ordinary income, which means that you will pay taxes on the money at your current income tax rate. This can be a disadvantage if you are in a higher tax bracket at the time of withdrawal than when you made your contributions.
Early withdrawal penalties: If you withdraw money from a traditional IRA before age 59 1/2, you will typically have to pay a 10% penalty on the withdrawal in addition to any taxes owed. This penalty can be waived in certain cases, such as if the withdrawal is used for certain qualified expenses such as higher education, first-time home purchase, or certain medical expenses.

Limited flexibility

No Roth Conversion: Once the money is in a traditional IRA, it cannot be converted to a Roth IRA, which may limit your flexibility in the future.
Income limits for tax-deductible contributions: For those who are covered by a retirement plan at work, the deductibility of traditional IRA contributions phases out as your income increases, and above certain income limits, the contributions will not be tax-deductible.
No Roth IRA tax-free withdrawals: With a traditional IRA, you will not be able to make tax-free withdrawals in retirement like you would with a Roth IRA.

FAQ 4 about What Are Traditional IRAs: Alternatives

Alternatives

Roth IRA: A Roth IRA is similar to a traditional IRA, but contributions are made with after-tax dollars and withdrawals in retirement are tax-free.
401(k): A 401(k) is a employer-sponsored retirement plan that allows employees to make pre-tax contributions and, in some cases, employer matching contributions.
SEP IRA: A SEP IRA is a retirement plan for self-employed individuals and small business owners. It allows for larger contributions than a traditional IRA, up to $58,000 in 2021 or 25% of compensation, whichever is less.
Simple IRA: A SIMPLE IRA is a retirement plan for small businesses and self-employed individuals. It allows both employer and employee contributions, and has lower administrative costs compared to a traditional 401(k)
HSA: A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. Contributions are made pre-tax and withdrawals for qualified medical expenses are tax-free.
Non-deductible Traditional IRA: A non-deductible traditional IRA allows you to make contributions even if you exceed the income limits for tax-deductible contributions to a traditional IRA.

Contributions

Taxable Investment Accounts: A taxable investment account, such as a brokerage account, allows you to invest in a wide range of assets, including stocks, bonds, and mutual funds, but contributions are not tax-deductible and withdrawals are subject to capital gains taxes.
Deferred annuities: Deferred annuities allow you to save for retirement on a tax-deferred basis and can provide a guaranteed stream of income in retirement.
Life insurance policies: Some life insurance policies, such as whole life or universal life, have cash value that can accumulate on a tax-deferred basis and can be used as a retirement savings vehicle.
Pension plans: Some employers offer pension plans, which provide a guaranteed stream of income in retirement based on your years of service and salary history with the company.

FAQ 5 about What Are Traditional IRAs: No Action

Required Minimum Distributions: If you do not take the required minimum distribution (RMD) from your traditional IRA, you will be subject to a 50% excise tax on the amount that should have been withdrawn. This is a significant penalty, so it’s important to make sure you understand the RMD rules and take the required distributions on time.

Beneficiary Designations

Taxable withdrawals: Withdrawals from a traditional IRA are taxed as ordinary income, so it’s important to consider the tax implications when taking money out of the account. It’s also important to consider the impact of taking money out of the account on your overall tax situation, especially if you’re nearing retirement age or already retired.
Beneficiary Designations: It’s important to review and update your beneficiary designations on your traditional IRA to ensure that the account will be passed on to the person(s) you want to benefit. If you don’t have a beneficiary, or if your beneficiary predeceases you, the account will be paid out to your estate, which could result in a larger tax bill and a longer distribution period for the beneficiaries.
Review your investments: Over time, your investment goals, risk tolerance, and time horizon may change, it’s important to review your investments and make sure they align with your current financial situation and goals. It’s also important to consider the impact of inflation on your investments and make sure your portfolio has enough growth potential to keep pace with it.

Valuable savings tool

Consider other savings options: While traditional IRAs can be a valuable savings tool, it’s important to consider all of your options and diversify your savings across different types of accounts, such as Roth IRA, 401(k), taxable accounts, etc. This can help you to manage your tax liability and take advantage of different tax benefits and investment options.
Review your overall retirement plan: If you’re not taking any action with your traditional IRA, it’s important to review your overall retirement plan and make sure you have enough savings to support your goals. Consider working with a financial advisor to help you create a comprehensive retirement plan that takes into account all of your savings, investments, pensions, and other sources of income.

FAQ 6 about What Are Traditional IRAs: Case studies

What Are Traditional IRAs Case study 1

Jane is a 45-year-old self-employed consultant who has been contributing the maximum amount to her traditional IRA every year. Jane has a balanced portfolio of stocks and bonds, and plans to retire at age 67. She will be able to take advantage of the tax-deferred growth and the tax-deductible contributions of her traditional IRA to accumulate a significant nest egg for her retirement.

What Are Traditional IRAs Case study 2

John is a 55-year-old engineer who has been contributing to his traditional IRA for the past 20 years. He has a diversified portfolio of stocks, bonds, and mutual funds. John plans to retire at age 62 and will be able to use the funds from his traditional IRA to supplement his other retirement income sources.

What Are Traditional IRAs Case study 3

Sarah is a 35-year-old accountant who has been contributing to her traditional IRA for the past five years. She has a high-risk portfolio of mostly stocks and plans to retire at age 60. Sarah will be able to take advantage of the tax-deferred growth of her traditional IRA to accumulate a significant nest egg for her retirement, but she will need to be mindful of the impact of taxes on her withdrawals.

What Are Traditional IRAs Case study 4

Michael is a 25-year-old recent college graduate who has just started contributing to his traditional IRA. He has a long-term investment horizon and plans to retire at age 67. He will be able to take advantage of the tax-deferred growth and the potential for tax-deductible contributions of his traditional IRA to accumulate a significant nest egg for his retirement.

What Are Traditional IRAs Case study 5

Rachel is a 55-year-old nurse who has been contributing to her traditional IRA for the past 20 years. She has a diversified portfolio of stocks, bonds, and mutual funds. Rachel plans to retire at age 62 and will be able to use the funds from her traditional IRA to supplement her other retirement income sources.

What Are Traditional IRAs Case study 6

David is a 40-year-old teacher who has been contributing to his traditional IRA for the past 10 years. He has a diversified portfolio of stocks, bonds, and mutual funds. David plans to retire at age 65 and will be able to use the funds from his traditional IRA to supplement his other retirement income sources. David will also need to take into account the RMDs and the taxes that apply on his withdrawals.

Video What Are Traditional IRAs: Differences

FAQ 7 about What Are Traditional IRAs: Differences

A traditional IRA is a type of individual retirement account that allows individuals to save for retirement on a tax-deferred basis. Contributions to a traditional IRA may be tax-deductible, and the money in the account grows tax-free until it is withdrawn.

Differences

There are several key differences between traditional IRAs and other types of investments:

Tax treatment: The main difference between a traditional IRA and other types of investments is the tax treatment. Contributions to a traditional IRA are tax-deductible, and the money in the account grows tax-free until it is withdrawn. In contrast, investments in other types of accounts, such as a taxable brokerage account, are subject to taxes on both the contributions and the growth.
Contributions: Traditional IRAs have limits on how much an individual can contribute to the account each year. Contributions are capped at $6,000 for those under age 50, and $7,000 for those age 50 or older (2022) . This limit is lower compared to some other types of retirement accounts, such as a 401(k), which may allow for much higher contributions.
Withdrawals: Withdrawals from a traditional IRA are subject to income taxes and may also be subject to a 10% early withdrawal penalty if taken before age 59 1/2. Other types of investments, such as a taxable brokerage account, have no such restrictions on withdrawals.

Investment options

Required Minimum Distributions: Traditional IRAs have Required Minimum Distributions (RMD) starting at age 72. This means that account holders must begin taking out a certain amount of money each year, regardless of whether they need or want the money.
Investment options: Traditional IRAs typically offer a wider range of investment options compared to other types of retirement accounts. Traditional IRA account holders can choose from a variety of stocks, bonds, mutual funds, and other investment vehicles.

In summary, traditional IRA’s offer tax advantages but have contribution limits, withdrawal restrictions and RMDs starting at age 72, while other investments like taxable brokerage accounts may not have contribution limits but are subject to taxes on both contributions and growth and no restrictions on withdrawals.
We hope this webpage did inform you sufficiently in answering your question “What are Traditional IRAs?” .