A traditional IRA is a way of saving for retirement that gives you tax advantages. Generally, the amounts of your traditional IRA (including profits and profits from investments such as Gold in an IRA account) are not taxed until you make a distribution (withdrawal) of your IRA. Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels. The traditional IRA allows you to contribute part of the money before taxes.
That reduces your taxable income for the year and, at the same time, sets aside money for retirement. Taxes will be paid when you withdraw the money. The Roth IRA allows you to contribute money after taxes. There are no immediate tax savings, but once you retire, the amount you paid and the money you earn are tax-free.
There are no income limits for opening and contributing to a traditional IRA. If you get it from a broker, you'll be able to invest in stocks and bonds; bank IRAs generally offer certificates of deposit and savings accounts. In addition to the general contribution limit that applies to both Roth and traditional IRAs, your contribution to the Roth IRA may be limited depending on your reporting status and income. You'll pay taxes now, at a lower rate, and you'll withdraw tax-free funds when you retire when you're in a higher tax bracket.
In the long term, which is the investment time horizon you have in your IRA, investing in the stock market gives you the most return on your investment. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participate in another retirement plan at work. In fact, that could make you eligible for an IRA deduction, since your contributions to the work plan reduce your taxable income for the year. However, the total of your deposits in all accounts must not exceed the total IRA contribution limit for that tax year.
If you file a joint return, you may be able to contribute to an IRA even if you haven't had taxable compensation for as long as your spouse did. The severe penalties for early withdrawals are one of the downsides of contributing to an IRA, but they're not the same for traditional IRAs and Roth IRAs. You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or company. As shown in the table, the traditional IRA allows you to contribute to your pre-tax income, so you don't pay income taxes on the money you invest.
For example, if you're in a higher tax bracket, it might make sense to opt for a traditional IRA to get tax relief today, saving you a lot of money that isn't immediately paid to Uncle Sam. Tax-deferred growth means that any profit you would pay taxes for in a standard brokerage account will be delayed in the future. However, the tax benefits of investing in an IRA start only when you start putting money into the account. Instead, you can withdraw sums equivalent to your Roth IRA contributions without penalty or taxes at any time and for any reason, even before age 59 and a half.
The IRA can be an incredible tool for planning for a good retirement, but you'll need to understand the tax implications of your choice to get the most out of the program.
