The Traditional IRA is the second account that we will look at in the IRA Awareness Week series. Earlier in the week, you read about the Roth IRA, a very much misunderstood option for people looking to make savings for retirement. Now we look at the traditional IRA, which many more people have.
The traditional IRA is designed to let people put away money every year for their retirement. The contribution limits are $5,000 if you are under 50 years old, or $6,000 if you are 50 or older. When you turn 59 ½ you can start withdrawing, and you have to start withdrawing money by April 1st of the year after you turn 70 ½.
The primary advantage to IRAs is that your deposits are generally tax-deductible, so withdrawals are taxed as income in the future. In effect, you are trading a tax deduction today and paying tax on income in the future (unlike a Roth, which pays tax now for future untaxed income).
One major advantage of the traditional IRA: they are easy. There are dozens of banking and investment companies that will manage them, so you can set one up virtually anywhere, and you can control the investments it makes. Your contributions and earnings can be used to purchase stocks, bonds, certificated of deposit, mutual funds, and a wide range of other options. All you have to do to contribute is make money.
With traditional IRAs, you may be able to pull money (including both contributions and earnings), out without taxes or penalties for certain major life prior to retirement, but it depends on the rules of the account you have. Each account is slightly different, so investigate these options before you decide which one to go with!
The basic standards for waiving the 10% early withdrawal fee:
- permanent disability,
- first time home purchase,
- medical expenses, death,
- higher education and tuition expenses,
- paying back taxes, and
- paying medical insurance premiums if you are unemployed.
The caveat to these is that regardless of your reason, there is a five year waiting period on deposits being used for any purpose; if you put in money this year, you can’t withdraw it without penalty for five years even for these reasons.
One note: be sure that you name a beneficiary! Unlike a 401(k), your spouse is not the automatic beneficiary of your account in the case of your death. If a beneficiary is not named, the funds in your IRA can get tied up in court for years or even end up reverting to the state.
Tags: beneficiary, finances, investing, IRA, long term, money, Retirement, setting goals, traditional
