Good Morning! Today we are going to talk about the Traditional IRA and how you can use it to save for retirement!
A Traditional IRA is a significant savings vehicle for those looking to save additional monies or for those not covered by an Employer Plan. They first came on the scene in 1975 and were offered as an efficient way for individuals to save on a before-tax basis. They shortly rose to popularity with 401k rollovers and before-tax planning
Traditional IRAs have several benefits:
1. The Tax deduction – Since you contribute on a before-tax basis, you receive a tax deduction for your contributions. The current annual contribution limit is $6,000.
2. Tax deferral – Assets also grow tax-deferred in an IRA until distributions are made. Meaning, you do not have to pay taxes on the growth each year.
3. Catch-up – At age 50 you can make a catch-up contribution of $1,000. Bringing the total to $7,000 for 2020.
4. Anyone can contribute – Probably the biggest benefit is that anyone with earned income can contribute to a Traditional IRA. There is no longer an age cap on IRAs thanks to the SECURE Act.
Things to keep in mind:
1. There is a 10% early withdrawal penalty for withdrawals taken prior to age 59½.
2. However, you may take Penalty-free withdrawals for first home purchase, births, adoptions, and certain college expenses.
3. Everyone is required to take a Minimum Distribution (RMDs) starting at age 72. You will be required to take a percentage of your previous years, year-end account value. This percentage is determined by the IRS life expectancy tables.
Do keep in mind, the $6,000 annual contribution limit applies to both Traditional and Roth IRAs. Meaning, you cannot contribute $6,000 to a Roth and a Traditional IRA. It is a combined total.
You should consider the investment objectives, risks, charges and expenses of the IRA, and its underlying fund options or mutual funds offered carefully before investing.
I hope you've found this article to be informative. If you have any financial questions please feel free to contact Stephen below.