Traditional IRA

The Traditional IRA or individual retirement account (IRA) is retirement account that is held by a custodial financial institution like a bank, insurance company, or brokerage firm.  The company that is in charge of overseeing and managing the account can invest the funds in any financial venture that the custodial institution permits as an investment vehicle.  Traditional IRA’s do not have all the restrictions of a Roth IRA.  The most notable benefit of a Traditional IRA is the fact that contributions are tax deductable but the contributions are subject to stringent requirements for eligibility depending on your income, filing status, and accessibility of other retirement plans.  While funds are maintained in the IRA, they are not subject to taxation but as soon as the funds are withdrawn, they will be taxed.  This is a good idea for people that expect to be in a lower tax bracket when they retire.

Traditional IRA’s work best for people that do not make a lot of money or have a lot of money to contribute to the IRA at once because there is a limit on how much of your contribution is tax deductable according to your filing status.  However, you should be aware that Traditional IRA’s also have more restriction on withdrawals and investments than other types of retirement accounts.  A percentage of the contributions made to a Traditional IRA is tax-deductible.  That means that the investor receives the tax deduction benefit as soon as he/she makes the deposit into the IRA.

The main disadvantages of a Traditional IRA include:

• Eligibility requirements limit the amount of tax-deductible contribution according to the income and filing status of the contributor.
• Stock holdings in the IRA will have to pay taxes on dividends and capital gains.
• Withdrawals are taxed when they are taken out so if an investor is in a higher tax bracket when he/she withdraws the money they will pay more in taxes than they would have when they contributed.
• Withdrawals are considered gross income and subject to federal income tax.
• Investors must begin withdrawing their money when they are seventy-and-half years old.
• An investor that does withdraw the required amount at the appropriate age will lose half of the mandatory amount that should have been withdrawn to the IRS.
• If the investor withdraws any money before they are fifty-nine and-a-half years of age they will have to pay an early withdrawal penalty of 10% of the amount withdrawn.