What Is a Traditional IRA?
Many people want to save for their retirement but do not have a 401K or similar plan through an employer. If you are one of these people or would like to save additional money for your retirement, consider a traditional IRA. What Is a traditional IRA? It's an investment account that provides some significant tax benefits for saving and investing. This article describes the traditional IRA, its benefits, and how it differs from other IRAs.
Other People Are Reading
-
Types
-
The two main kinds of IRAs are the traditional and the Roth IRA. Traditional IRAs allow you to deduct the money you contribute and you pay no taxes on profits while the money remains in the account. Taxes must be paid only on the money you withdraw when you retire. A Roth IRA does not provide a tax exemption for contributions, but you do not pay taxes on the money when you eventually withdraw it from the IRA.
Function
-
For most people, the traditional IRA is the best for saving for retirement. In general, people will be in a lower tax bracket after they retire, so the up-front tax deduction is especially good for reducing income in high tax brackets. By contrast, if you expect to be in a higher tax bracket after retirement, the Roth IRA is probably better. Roth IRAs are also used for saving for large expenses like college education since the money can be withdrawn after a few years. With a traditional IRA you must wait until retirement to withdraw funds or face a stiff penalty.
-
Features
-
To open a traditional IRA you must be under 70-1/2 years of age. You can contribute up to $6000 each year (as of 2008) into your account. When you open the IRA, the company you use (usually a bank, mutual fund, or brokerage firm) acts as the custodian. Which you choose depends largely on the kinds of investments you wish to make and the types of investments the custodian accepts.
Benefits
-
Anyone who has earned income can open an IRA, even teenagers with a part-time job. The traditional IRA is a flexible investment vehicle. You can choose a variety of investment types and have the option to make the traditional IRA a self-directed IRA, maximizing your choices of investments. Although you cannot withdraw money from a traditional IRA until retirement you can "borrow" funds from the account for 60 to 120 days, depending on the purpose of the withdrawal.
Considerations
-
If you open a traditional IRA with a bank and invest in CDs, there is often no fee and the CDs are insured by the FDIC. Most banks allow other types of investments for modest fees. If you want a higher return on your investment, consider opening a traditional IRA with a no-load mutual fund ("no load" means the fund does not charge a portion of your investment in addition to other fees). Because mutual funds are professionally managed portfolios of stocks and other securities, they do carry higher risk, so you should research the fund before you invest. If you wish to make your own investment decisions, consider an IRA with a discount brokerage firm. If you choose this route, make sure you know the terms and conditions of the account and research all investments carefully before making investments.
-
