When talking about saving for retirement, plenty of questions come up. A pretty popular one is, "What is a Traditional IRA?" There are many ways that people can save money for retirement. One of the most popular is through the use of an Individual Retirement Account, or an IRA. The biggest draw for using a traditional IRA is the big tax break that it comes with, but it’s important to know all that you can about any savings method before making a decision. Retirement savings is often done through a series of investment choices, but an IRA is not actually an investment, it’s just the place where you keep all of your assets.
Another popular type of retirement savings account is a 401(k), which is an account that is provided by a person’s company. 401(k)s are managed by investment specialists, and the money that an individual puts into it is then distributed amongst different investment opportunities that vary in risk and return. IRAs, on the other hand, are accounts that individuals open on their own, and come in different types, such a traditional IRA, Roth IRA, SEP IRA, and SIMPLE IRA.
Each type of IRA has its own set of eligibility requirements, so certain individuals are not able to take advantage of all types, depending on their incomes or employment statuses. No matter what type of IRA you wind up choosing, all of them have caps that limit the amount of money you can put into them each year, and penalties if you decide to withdraw money before you reach the specified age of retirement.
What is a Traditional IRA?
The major appeal of a traditional IRA is that the money you put into it is tax-deferred. This means that you can contribute a portion of your income before it is taxed to your IRA, saving you from having to pay your current tax rate for that amount of money. The objective is that because you don’t start taking money out of your IRA until you’re over 70, you’ll likely be in a lower tax bracket when you’re retired than you are while you’re working. When you withdraw the money from your IRA, you’ll have to pay taxes on it, but within whatever tax bracket you fall into at that time.