Traditional IRA

Traditional IRAs are a type of individual retirement account that allows individuals to create pre-tax contributions and easily save money for retirement. There are many investment opportunities to choose from and investments in the account grow tax-deferred. During retirement, the owner will pay income tax on withdrawals from the traditional IRA.

How does a traditional IRA work?

At first, the rules and workings of traditional IRAs may seem complicated. At Care Financial, our experts are skilled to help walk you through this process. Here are just a few key characteristics and general concepts associated with traditional IRAs:
  • Investments. Using the money in your traditional IRA, you are able to invest in stocks, bonds and many other assets. Whether you lose or gain money depends on your investments and their growth. For long-term goals such as retirement, stocks and bonds are more highly invested in due to their historical returns. 
  • Contribution Limits. During 2021 and 2022, you may currently only add $6,000 to your traditional IRA ($7,000 if you are over the age of 50), even if you are also contributing to other retirement plans. You may add to the IRA by rolling over money from another retirement account, and generally, you must have an earned income to contribute to your IRA account. 
  • Contributions May be Tax-Deductible. If your earned income is $70,000 and your contribution to your traditional IRA is $6,000, your taxable income during that year is eligible to drop to $64,000.
  • Withdrawal Rules. You are not eligible to be taxed on the gains until you withdraw them. If you withdraw money from your traditional IRA before the age of 59 ½, you may be required to pay a 10% early withdrawal penalty. However, there are some expectations for this penalty, such as needing money for college, purchasing a home, or other circumstances. At the age of 70 ½, you must start taking required minimum distribution. 
Different from Roth IRAs. Roth IRAs have no tax deductions when you make contributions, but instead the withdrawals come out tax-free in retirement. As long as you follow Roth IRA rules, you never pay taxes on investment earnings.

Benefits of a Traditional IRA

Traditional IRAs have many benefits: 

  • There are no income limits to open and contribute to your traditional IRA. 
  • If eligible for the tax deduction, you may claim it whether or not you itemize deductions on tax returns. 
  • Money in a traditional IRA may go towards qualified college expenses without paying an early distribution penalty, although you will pay taxes on the distribution. 
  • Up to $10,000 from your traditional IRA may be used to purchase your first home.

If you believe a traditional IRA may be in your best interest, contact Care Financial today! Our experts will help decide the best course of action for your retirement, whether it be through a Roth IRA or a traditional IRA, as it all depends on your financial status and financial future. As we work together, you will learn more about the traditional IRA processes, pros, cons and everything in between. Care Financial can’t wait to help you begin your retirement process!