A traditional IRA, or Individual Retirement Account, is a type of retirement savings account that allows individuals to save for retirement with tax-deferred growth. Contributions to a traditional IRA may be tax-deductible, and any investment gains in the account grow tax-free until withdrawals are made in retirement.
With a traditional IRA, individuals can contribute up to a certain amount each year, based on their age and income level. In 2021, the annual contribution limit for individuals under the age of 50 is $6,000, and individuals age 50 and older can make an additional $1,000 catch-up contribution. However, the amount that an individual can contribute and deduct from their taxable income may be limited based on their income level and whether they have access to an employer-sponsored retirement plan.
Withdrawals from a traditional IRA are taxed as ordinary income, and individuals are required to start taking required minimum distributions (RMDs) once they reach age 72. In addition, early withdrawals (before age 59 1/2) may be subject to a 10% penalty, in addition to ordinary income taxes.
Overall, a traditional IRA can be a valuable tool for retirement savings and tax planning, particularly for individuals who expect to be in a lower tax bracket in retirement. However, it’s important to consider the rules and restrictions associated with traditional IRAs, as well as other retirement savings options, to determine the best strategy for your individual financial situation.
