Know all about Traditional IRA

You might think – “I have a long time to go before retiring, it is not necessary to save now!” This is a common blunder made by many, due to which they were not left with much savings during the post-retirement phase. Remember that it is never too early to start saving.

What is Traditional IRA?

It is also known as individual retirement account, where you put in cash on a regular basis to tide you over when you retire. A lot of companies offer a 401k savings scheme, but if you are self-employed or you are not being provided with a 401k savings plan, it is best to invest in a traditional IRA. It helps to manage retirement savings proactively. You can choose to deposit sums on monthly or yearly basis as per your convenience. Taxes will not be levied on this amount till it is time to withdraw. A bank or brokerage firm can manage your IRA, while investing the contributions in ventures such as stocks, certificates of deposit or mutual funds. As long as the profits are in the account, they will be untaxed.

Details about Traditional IRA

A major advantage when it comes to a traditional IRA is the tax savings offered, while the tax benefit is applied right away in the same year of contribution. You can save quite a bit of money in taxes. For instance, if you fall under a lower tax bracket after retiring, the savings will be taxed accordingly at a lower bracket after the amount is withdrawn.

There are a couple of pointers to keep in mind:

• Penalties are levied if the sum is withdrawn early, because contributors need to wait till their age is 70 ½ to gain access to the funds. Half of the contributions will go to the Internal Revenue Service if you choose to withdraw before your age is 70 ½. There is another type of IRA known as Roth IRA, where you don’t have to pay penalties during withdrawals, but the contributor will be taxed the moment he sets the amount aside.
• There is a 10% penalty if early withdrawal is made from age 59 ½. There are some conditions under which, it might be exempted such as paying tuition fees for higher studies, buying a home for the first time, medical fees, and payments to the IRS.
• Funds from the IRA can be moved via roll over or transfer but only for a maximum period of 60 days, after which the money needs to be roller over back into the account.

To know more about how much a traditional IRA will amount to after retirement; use a financial calculator for a more accurate estimate. The figure will help you work towards it systematically.