Retirement Declassified: Traditional IRA
Whenever you start preparing for retirement, you’ll notice that it’s not quite as easy as just “saving money”. There are about a million (slight exaggeration) different avenues you can choose to build your nest egg. Traditional IRA’s, the topic of today’s post, are just one of those methods.
IRA stands for Individual Retirement Account. There are two different types of individual retirement accounts to choose from, Traditional IRA’s and Roth IRA’s. An individual who is younger than 50 years old is allowed to contribute up to $5,500 annually to an IRA. Individuals between the ages of 50 and 70 ½ can make a maximum contribution of $6,500.
The money you contribute to a Traditional IRA isn’t taxed until you take it out of the account. Meaning the capital gains grow tax-deferred until a withdrawal is made. This is advantageous because it allows for tax-free compounding to take place. Another benefit of Traditional IRA’s is that contributions are tax deductible.
There is no income limit on who can invest in a Traditional IRA, as long as you fall under the given age parameters. You can begin to make unpenalized withdrawals from your account whenever you reach the age of 59 ½. Once you reach the age of 70 ½ you are required to take minimum distributions from your account. Any withdrawals made before the age of 59 ½ are subject to a 10% federal penalty tax. There are, however, a few exceptions for withdrawals you can make before the age of 59 ½ without getting penalized. These include breaks for first-time home buyers and withdrawals spent on higher education.
It is important to point out that the annual contribution limit applies to the individual, not the account itself. Meaning even if you own 4 IRA’s, you still can’t exceed the $5,500 annual maximum.
This is just one vehicle you can use to build your retirement portfolio. Our goal here at The Money Dojo is to educate you on your different options so you can make a confident choice that makes sense for you specific situation.
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