How Do I Know If My IRA is Traditional?
IRAs are tax-advantaged retirement savings accounts. Your contributions may be tax deductible and investment earnings grow tax-deferred until withdrawals are taken, at which point they become taxable.
IRAs come in different styles to fit your investment goals and meet your specific needs. Discuss all your options with a NYLIFE Securities financial services representative to find one best suited to you.
Check the paperwork
IRAs are tax-advantaged accounts designed to help individuals save for retirement. Anyone earning wages or salaries, including minors, can open an IRA. Contributions are generally tax deductible; your contributions accumulate tax deferred until you withdraw them at retirement age and become subject to ordinary income taxation.
Administrators of traditional IRAs must send you Form 5498 by May 31 following any year in which you make contributions to an IRA, along with any information regarding amounts you contributed or rolled over from another type of account. This form will detail both contributions made directly into your traditional IRA account as well as amounts transferred over from another IRA account.
Federal law mandates that once you reach age 73, federally registered traditional and rollover IRA(s) require required minimum distributions from traditional IRAs or rollover IRA(s). You can choose to postpone taking your RMD until April 1 of the year following when you turn 74; but then two distributions will have to be taken that year. Traditional IRAs allow penalty-free withdrawals for certain situations – such as buying your first home; paying medical expenses including long-term care expenses; giving birth or adopting children; or qualifying federally declared disaster relief efforts.
Check the custodian
If you are uncertain whether your account falls into one of these categories, speak with its custodian. Most brokers and robo-advisers offer separate sections for IRAs that list rules and contribution limits; typically there are lower account minimums for these accounts than with traditional brokerage accounts.
Reputable custodians will understand which investments the IRS restricts from being placed into IRAs, such as collectibles and alcohol beverages, as well as available investment options such as mutual funds and ETFs.
Traditional IRAs require earned income to fund, with one exception for nonworking spouses: working spouses can use spousal IRAs to save for their nonworking partner’s retirement using spousal deductions (this often happens with stay-at-home parents and dads). Otherwise, an IRA may incur penalties and taxes; to prevent that, consider setting up “substantially equal periodic payments”.
Check the age of the account
Traditional IRAs provide tax-deferred growth, meaning any investment gains aren’t subject to tax until you withdraw them at retirement. Furthermore, your contributions could even qualify as tax deductible deductions depending on your income and whether or not you itemize deductions.
Your contributions should reflect both your goals and risk tolerance when choosing investments for an IRA account. Many people choose lower-risk options like CDs and money market accounts while investing more aggressively with stocks or mutual funds.
Individual Retirement Account (IRA) and retirement plan account owners must begin taking mandatory minimum distributions (RMDs) annually starting April 1 of the year they turn 72 (or 73 if born after 2023). If withdrawing money before age 59 1/2, an early withdrawal penalty of 10% plus taxes on earnings2 could apply.
Check the name of the account
Traditional retirement accounts (IRAs) allow you to make pretax contributions and postpone paying taxes until withdrawal, hopefully in retirement. Anyone with earned income and meeting certain other criteria is eligible to open one, including spouses.
Traditional IRA withdrawals (both contributions and earnings) are generally taxed as ordinary income, unless one qualifies for an exception such as first-time homebuyers, adoption expenses, unreimbursed medical expenses due to domestic abuse, death terminal illness or disability or certain other circumstances.
Convert funds from your traditional IRA into a Roth IRA is also possible; however, when doing so the IRS considers all of your traditional accounts at once and cannot pick out and convert just portions. Learn more about IRA conversions.
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