Traditional IRA
A Traditional IRA (Individual Retirement Account) is a retirement tool that allows for individuals to invest pretax dollars into an account whose investment earnings/gains grow on a tax-differed basis. By this, tax-differed means that the earnings or gains from any chosen investments will not be taxed until the beneficiary makes a withdrawal of funds. Additionally, contributions to a Traditional IRA may even be tax-deductible, depending on your income, current tax-filing status, and other factors. Custodians of the account are often commercial banks or retail brokers, who direct the account’s funds to the various investment vehicles that are available for the account holder to choose from. Other variations of the IRA include, Roth IRA of which contributions are on an after-tax basis, SEP IRA for those that are self-employed, and SIMPLE IRA for those employed by small businesses.
Questions and Answers About Traditional IRA
How do distributions work in a Traditional IRA?
Distributions from a Traditional IRA are taxed to the beneficiary as ordinary income. You are able to start withdrawing money from a Traditional IRA without penalties once you are past the age of 59 ½. However, if you withdraw any money from the traditional IRA before you have reached the designated age, you will incur a penalty of 10%. However, there are exceptions to this rule for the following situations:
- The money is going towards the purchase of your first home (limit of $10,000)
- You become disabled before you are able to make qualified distributions
- Your beneficiary receives the IRA upon your death
- Using the money for qualified higher education expenses*
- Using the funds for non-reimbursed medical expenses
- Paying for medical insurance with the IRA’s assets after recent unemployment
- The amount is a return of non-deductible contributions
- Distributions are part of the SEP plan
- As a result of an IRS levy
*Can use up to the contributed amount to pay for qualified higher education expenses incurred by yourself, your child, spouse, or grandchild.
What is the Contribution Limit in a Traditional IRA?
As of 2019, you are allowed to contribute up to $6,000. However, there is a catch-up provision in place for those 50 years or older, which raises the contribution limit from $6,000 to $7,000.
When am I no longer able to contribute to the Traditional IRA?
Once you reach the age of 70 ½, you are no longer allowed to contribute to a Traditional IRA.
How do I open a traditional IRA?
All of our advisors at Florida Financial are knowledgeable on IRA’s and can help guide you to make sure a traditional IRA is the right choice for you. Contact us today for a free consultation.
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