The traditional IRA investment account is a retirement savings account which is fairly similar to the 401(k) plan in that all contributions are tax-deductible. In other words, if you contribute money to a traditional IRA that you have already paid tax on, then the contribution will generate a tax rebate for you.
Any earnings of any type are not taxed within the account. This means that if an investment in a IRA account receives a dividend or interest payment, then that entire dividend or interest payment will be deposited in the account and there will be no taxes paid.
Most common security types (stocks, mutual funds etc) are allowed to be purchased in a IRA. These accounts can be set up at various financial institutions such as discount brokerages, banks or mutual fund companies.
Here is some information on converting to a Roth IRA account.
Annual contribution limits are $5,000 if you are 49 or under, $6,000 if you are age 50 or older. These limits are phased out with higher incomes. Someone earning a high income might have a lower contribution limit or no contribution room at all.
Contribution room cannot be carried forward for the traditional IRA. It’s a “use it or lose it” type of plan.
Withdrawals from a traditional IRA are considered taxable income and if the participant is less than 59.5 years of age then a 10% tax will also be applied.
Other things to think about
Depending on the situation, an investor might not be eligible for a deduction from their IRA contribution – in that case the money can still be put into the IRA and it won’t be taxed on withdrawal.
The 10% withdrawal tax for investors under 59.5 years of age can be waived for the following exceptions:
- Reduced life expectancy.
- Unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
- Medical insurance premiums after 12 weeks of unemployment compensation.
- First-time home purchase.
- Higher educational use.
- IRS levy for back taxes.