Traditional IRA (Individual Retirement Account) is a personal retirement savings account that lets you contribute pre-tax or after-tax money, allowing your investments to grow tax-deferred until you withdraw them.
How It Works
- Tax-Deductible Contributions: You may be able to deduct all or part of your annual contributions on your federal income taxes, depending on your income and whether you (or your spouse) are covered by a retirement plan at work.
- Tax-Deferred Growth: Investments inside the account—such as stocks, bonds, mutual funds, and ETFs—grow without being taxed each year.
- Taxed Withdrawals: When you take money out in retirement, distributions are taxed as ordinary income.
- Eligibility: Anyone with earned income (or a nonworking spouse filing a joint return) can open and contribute to a traditional IRA, regardless of age.
Key Rules & Withdrawals
- Early Withdrawal Penalty: If you withdraw money before age 59½, you will generally owe regular income tax plus a 10% early withdrawal penalty (unless you qualify for specific IRS exceptions).
- Required Minimum Distributions (RMDs): You must start taking mandatory withdrawals from your traditional IRA once you reach age 73.
- Where to Open One: You can set up an account through online brokerages, banks, or financial advisors.
- You can also review official guidelines on the Internal Revenue Service website.