What is a Traditional IRA and how does it work?

A Traditional IRA (Individual Retirement Account) is a type of retirement savings account with slight differences from a Roth IRA.
 
Key Features:

• Tax-Deductible Contributions
  • Contributions may be tax-deductible, depending on your income and whether you or your spouse are covered by a workplace retirement plan.
• Tax-Deferred Growth
  • Investments in the account grow tax-deferred.
  • You won’t pay taxes on earnings like interest, dividends, or capital gains until withdrawal.
• Contribution Limits
  • 2024 - you can contribute up to $7,000 per year if under age 50.
  • 2025 - you can contribute up to $7,000 per year if under age 50.
  • If you're 50 or older, you can contribute an additional $1,000 “catch-up” contribution.
• Withdrawals
  • You can start taking penalty-free withdrawals at age 59.5 (before age 59.5, withdrawals are subject to a 10% penalty, exceptions may apply for first-time home purchase, qualified education expenses, etc.)
  • You must start taking withdrawals called Required Minimum Distributions (RMDs).
  • Withdrawals are taxed as ordinary income.

 
Starting a Traditional IRA:

• Open an Account
  • You can open a Traditional IRA through your financial advisor or financial institution.
• Make Contributions
  • Fund the account within allowable limits
• Choose Investments
  • Select from stocks, mutual funds, etc.

 
NOTE: Contributions can be made up until Tax Day of the following year (i.e. – for tax year 2024, contributions can be made up to the April 15, 2025 filing deadline). Filing an extension on your taxes does NOT extend the deadline for contributing to your IRA.
 
Who Should Consider a Traditional IRA:

• Those who expect to be in a lower tax bracket in retirement.
• Those looking for a tax deduction in the current year.
• Workers who don’t have access to a workplace retirement plan (or who fall within income limits and want to contribute more beyond it).