Traditional IRAs

A Traditional Individual Retirement Account (IRA) is a popular retirement savings vehicle that offers several key benefits and features. Here are the most important things to know about a Traditional IRA

Tax Benefits

  • Tax-Deferred Growth: Contributions to a Traditional IRA are typically made with pre-tax dollars, meaning they can reduce your taxable income for the year in which the contributions are made. The investments within the account grow tax-deferred, and you only pay taxes upon withdrawal during retirement

Contribution Limits

  • Annual Contribution Limits: For 2024, the maximum contribution limit is $7,000, with an additional $1,000 catch-up contribution allowed for individuals aged 50 and older

  • Contributions must be made in cash, not securities or other assets

Eligibility

  • Eligibility Requirements: Anyone with earned income can contribute to a Traditional IRA, regardless of age. This includes non-working spouses who can contribute through a spousal IRA

Withdrawals and Penalties

  • Early Withdrawals: Withdrawals made before the age of 59½ are subject to a 10% early withdrawal penalty in addition to regular income tax. However, there are exceptions for certain situations, such as first-time home purchases and unreimbursed medical expenses

  • Required Minimum Distributions (RMDs): Account holders must begin taking RMDs starting at age 73. The amount is based on the account balance and life expectancy

Investment Options

  • Investment Flexibility: Traditional IRAs offer a broad range of investment options, including stocks, bonds, mutual funds, and certificates of deposit (CDs). The choice of investments depends on where the IRA is held, such as a bank or brokerage

Rollovers and Transfers

  • Rollovers and Transfers: You can roll over funds from other retirement accounts, such as a 401(k), into a Traditional IRA. It is advisable to perform a direct rollover to avoid tax withholding and potential penalties

Beneficiaries

  • Beneficiary Designations: You can name both primary and contingent beneficiaries for your Traditional IRA. These designations override any instructions in a will, ensuring that the account is distributed according to your wishes

Contribution Deductibility

  • Deductibility of Contributions: Contributions may be fully or partially deductible depending on your income, tax-filing status, and whether you or your spouse are covered by a retirement plan at work

Multiple IRAs

  • Multiple Accounts: It is possible to have more than one IRA, including both Traditional and Roth IRAs. However, the total contributions to all IRAs cannot exceed the annual limit set by the IRS each year

Understanding these key aspects can help you effectively utilize a Traditional IRA as part of your retirement savings strategy.

“This seems like a great tool for financial planning, but how do I implement it into my finances?”

This is where we come in. We are here to help determine what your best path forward is to achieve your financial goals. Please reach out via phone, schedule an appointment, or email for a free, no-obligation discussion about what makes sense for your financial situation.