Forget about getting rich quick: Start investing now and you’ll get richer, later.
A traditional IRA is a tax-advantaged retirement account. Bankrate explains.
What is a traditional IRA?
A traditional individual retirement account, or IRA, is a retirement savings account that allows someone to make contributions using her pretax dollars. Traditional IRAs have no income limitations and contributions to them are not taxed until retirement, making them the ideal choice for someone who expects to be in a lower tax bracket when she’s older.
Traditional individual retirement accounts are not taxed at the point of contribution, but rather at the point they’re withdrawn, meaning they provide a significant tax advantage to account holders later in life. However, if the money is withdrawn before the IRA’s designated retirement age of 59 1/2, the account holder will incur a 10 percent tax penalty from the Internal Revenue Service (IRS) unless the money is used for certain eligible expenses.
As of 2017, the maximum amount someone can contribute to her traditional IRA is $5,500 per year, until age 50, after which the maximum annual contribution becomes $6,500. The account holder can contribute until she turns 70 ½ years old, the age at which she must start withdrawing her money.
The account holder can deduct her contributions to a traditional IRA from her tax return, which is a tax benefit not offered to holders of other retirement accounts, such as the Roth IRA. Additionally, there is no income limitation on those who can contribute to an IRA, but the contributions must be funded with cash and fall under “taxable compensation,” which excludes tax-exempt income.
Saving for retirement? Get a great rate on a money market account using Bankrate’s comparison tool.
Traditional IRA example
Kenny is opening up a traditional IRA after starting his first job at age 22. He expects to make the maximum contribution of $5,500 every year until he turns 50, after which he plans to contribute $6,500 per year. Because he plans to retire at 62, Kenny can expect that the 40 years of growth will amount to $1,205,005 in retirement.
More From Bankrate
7 min read Aug 16, 2022
You can use time as a huge ally when planning your investments to build wealth in the long run.15 min read Aug 16, 2022
Consider the costs, educational resources and other factors before opening an account.7 min read Aug 16, 2022
Here’s where to turn when you’re searching for a safe place to stash cash for the short term.9 min read Aug 16, 2022
These are ten of the top index funds to consider adding to your portfolio this year.11 min read Aug 16, 2022
These standout apps can help get your finances organized and invested.10 min read Aug 16, 2022
Here are seven great advantages of a 529 plan and why it could be right for you.4 min read Aug 15, 2022
Here are the latest changes to Berkshire Hathaway’s portfolio and Buffett’s top bets.4 min read Aug 15, 2022
Virtual real estate may hold the potential for profits if the metaverse continues to grow.6 min read Aug 15, 2022