I’m so glad that you’re back for more learning and adventure. Yesterday we talked about Roth IRAs, but now it’s time to go a bit deeper into the discussion.
What’s a Traditional IRA?
Similar to a Roth IRA, it’s an account one can use for investing for retirement. But Traditional IRAs have some different key features that we should talk about a bit more.
- The money deposited into a Traditional IRA is typically pre-tax and can be tax deductible depending on your financial situation.
- The money that grows in the account over time is tax-deferred. In this case, it means you’ll pay taxes on the earnings when you make withdrawals in retirement because it counts as regular income.
- You must begin taking withdrawals from your account by the time you are 70 and half years old.
- Anyone who has earned income is eligible to contribute to an IRA; there are no income restrictions here. Your income will determine whether or not your contribution is tax-deductible like mentioned above.
The most significant differences are the mandatory withdrawals from a Traditional IRA by age seventy and a half, and the income dependent tax situation.
What are the benefits of a Traditional IRA?
- Some would say that being able to use their contribution to their retirement fund as a tax deduction is a cool benefit (for those in the appropriate income bracket).
- If you expect to be in a lower tax bracket when you retire, tax-deferral can work out really well in your favor.
This brief information is just the tip of the iceberg, but it’s good to start thinking about if you haven’t yet given much thought to your long-term investment plans.
Now that we’ve looked at Roth and Traditional IRAs, there are a few more types of IRAs to explore.
Stay tuned for more!
Until next time,