What Are the Two Types of Traditional IRAs?
IRAs offer a convenient and tax-efficient way of saving for retirement with deductible contributions, but there are numerous details and restrictions related to annual contribution limits and taxes to take into account when managing one.
Traditional IRAs allow tax-deferred growth on investment earnings until you withdraw them in retirement, and contributions made deductible if either you or your spouse has taxable compensation such as wages, salaries, commissions, tips and bonuses.
Traditional IRAs enable individuals and couples to save pre-tax or after-tax dollars tax deferred until withdrawals become income in retirement. You are limited in how much taxable compensation (such as wages, salaries, commissions, tips, bonuses or net earnings from self-employment) you can contribute per year; contributions cannot exceed this total figure.
2023 contributions maximums will remain $15,500 per person with an optional catch-up contribution of $3,500 if 50 or older. You may be eligible for reduced IRA contributions if you or your spouse are covered by workplace retirement plans such as 401(k), 403(b), or 457 plans.
Before age 59 1/2, funds may also be withdrawn without penalty from an IRA for qualified expenses, such as medical bills over 7.5% of your adjusted gross income and first-time home purchases. You will generally incur an early distribution penalty of 10% in addition to normal income taxes if withdrawing early distributions for non-qualifying reasons (refer to IRS Publication 590-B for more details).
Taxes on Withdrawals
Traditional IRA withdrawals are subject to regular income taxes in the year they’re received and, if taken prior to age 59 1/2, may incur an early withdrawal penalty of 10%.
Traditional IRAs offer an ideal way for those without access to workplace retirement plans to save for their retirement with pre-tax dollars. TD Ameritrade provides various IRA options, including commission-free ETFs and no transaction-fee mutual funds1.
Traditional IRAs can be powerful retirement investment vehicles, no matter your investing style. Choose your IRA provider according to your needs, such as investing directly or with a robo-advisor, beneficiary designations for an IRA are final and may override instructions in your will; and transfering an IRA to another institution within 60 days (known as rollover). Contributions and earnings made with taxable compensation such as wages, salaries, tips commissions bonuses or net profits from self-employment qualify for tax deduction.
Required Minimum Distributions
Once IRA account owners reach 70 1/2, they must take minimum distributions (RMDs). RMD amounts depend on account balance, life expectancy and taxable income.
Your annual deductible depends on several factors, including your modified adjusted gross income (MAGI) and filing status, whether or not you participate in a workplace retirement plan, the size of any other IRAs you own, as well as whether or not MAGI allows for full or partial IRA contributions.
If you withdraw funds from an IRA before age 59 1/2, they could incur an IRS 10% early-withdrawal penalty. To circumvent this penalty and still cover certain expenses, Roth conversion can help. It allows in-kind transfer of investment shares to a taxable account, taxed as ordinary income in the year of conversion. Both Traditional and Roth IRAs support Roth conversion.
An Individual Retirement Account, or IRA, is one of the most effective strategies for saving for retirement. A traditional IRA’s primary advantage lies in not incurring taxation until withdrawing funds during retirement.
Contributions may also be eligible for tax deduction, depending on your income level, while switching jobs or leaving workplace plans such as 401(k), 403(b), or 529 college savings plans can make using a traditional IRA an excellent way to move assets between accounts.
Schwab makes it simple and accessible for you to take advantage of all the benefits an IRA can bring. Our wide array of investment options – such as commission-free ETFs and no transaction-fee mutual funds1-combine with education, tools, and support to give you confidence about your future. Open a traditional or Roth IRA today online – or compare both accounts so you can find one best suited to you*
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