General Overview of Traditional IRA

investing.jpgSo I’m in the process of researching what investment funds to choose from for my first contribution. Since I’ve been reading a lot about IRA accounts I decided to share some useful information that I gathered.

The traditional and the Roth IRA, also known as Individual Retirement Account, is a retirement plan account that offers some tax advantages  for retirement savings .They are usually invested in stocks or mutual funds( there also other methods such as Certificate of Deposits, notes, and derivatives). There were 5 different kinds of IRA that I came across.

  1. Traditional IRA
  2. Roth IRA
  3. SEP IRA
  4. SIMPLE IRA
  5. Self-Directed IRA

Out of these 5 I’m going to concentrate on the two most popular the traditional and the Roth. Today I will cover just the Traditional  IRA and tomorrow I will go over Roth IRA.

I think the easiest way to understand what Traditional IRA is is to develop a list to differentiate between the goods and the bads. So heres a list of 4 advantages and disadvatages of Traditional IRA:

Advatages:

  • The main advantage of a Traditional IRA, is that contributions are often tax deductable. If a taxpayer contributes the maximum amount of $4,000 to a traditional IRA and is in the twenty-five percent marginal tax bracket, then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year.
  • If a taxpayer expects to be in a lower tax bracket when the person is close to his retirement than during the working years, then a traditional IRA offers an increased incentive over the Roth IRA.
  • The taxpayer gets the tax benefit immediately
  • This is just a rumor but With the Roth IRA, there may be a risk that over the next several decades Congress will decide to tax Roth IRA distributions.

Disadvantages:

  • There are the eligibility requirements for the tax-deductibility.
  • All withdrawals from a Traditional IRA are included in gross income and subject to federal income tax.
  • If one has a lot of disposable income, (total amount of income an individual makes after taxes), a Roth IRA in effect shelters more assets from taxes on gains than a Traditional IRA does.
  • The greatest disadvantage of the Traditional IRA is its forced distributions based on age.

So in general, Tradiontal IRA have these following characteristics:

1.) Contributions are often tax-deductible

2.) All transactions and earnings within the IRA have no tax impact

3.) Withdrawals at retirement are taxed as income

Tomorrow I will be covering Roth IRA so stay tuned.

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