Traditional IRA

What you should know about the Traditional IRA?

Every investment expert will tell you that it is never too early to plan for retirement. Many of us are so busy with our lives, daily chores and expenses that it is very easy to think that planning for retirement can be put off until later. Think again. Reflect a moment on the fact that once you are retired, your level of income will come down drastically. It is only so much that your savings can do. In addition, remember also, that your medical expenses will also go up as you grow older.

There are many retirement plans open to citizens of this country and the Traditional IRA (Individual Retirement Account) is one of them.

In a Traditional IRA you can open an account to contribute in a variety of ways. You can contribute in a brokerage, mutual fund or even into a bank account.

One of the main requirements of a traditional IRA is that you should be earning a secured income at the time of opening the account. You can contribute sums until the time you are 70 ½ years old. The amount of money you can contribute toward this account varies. Until age 49 the maximum amount of money which you can put into this account is $5000. When you are 50, this amount increases to $6000. Remember to make your Traditional IRA contribution before the annual April 15th tax deadline, lest you miss your tax deduction.

The money that you contribute is tax free. What that essentially means is that if your income is lets say, $ 60000 per year and you are have contributed $5000, you will be taxed for only ($60000-$5000) = $55000. Even other incomes like dividends, interest and Capital gains on investment are tax free. The rider to the Traditional IRA is that all the income that you withdraw after you are 701/2 will be taxable. The thinking behind this is that it is assumed that by age 701/2 and you are retired your annual income will be lower than your present income and hence you will fall into a lower tax bracket and consequently pay less taxes.

It is pertinent to note that you cannot withdraw any amount until you are 59 without paying a stiff penalty (there are certain exceptions to this rule).

One of the disadvantages of the Traditional IRA is that once you turn 701/2 you are forced to withdraw a certain amount of money every year whether you are in need of it or not. Called required minimum distribution (RMD), the failure to adhere to it attracts stiff penalties.

There are certain other conditions attached to the traditional IRA.

If you are covered by an Employer Retirement plan, the deductions you can take in your Income tax will vary depending on how long you were covered that year by that plan. Furthermore, the deductions will also depend on the amount of income the individual has filed and what social security benefits were availed.

It must be noted that the deductions on tax will decrease once when the income reaches a certain level and will be completely phased out when it reaches a particular higher level.

There are certain other conditions pertaining to who or how much one can contribute to a traditional IRA. Spousal IRA limit is one of them.

There are also other retirement plans available in this country. The Roth IRA is one of them. Though the subject of retirement plans is not rocket science, it would be a good idea to talk to an expert in this field. He will be in a position to assess what kinds of plans you will need. Whether it is the traditional IRA or any alternative plan, it would be best gauged by a retirement plan professional.

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