A Simple Look at Traditional IRAs
The Main Advantages
A traditional IRA defers taxation on the contributions to the account until you withdraw money after you retire. You may also deduct some or all of your pretax contributions you send to the IRA. You do not pay income taxes on contributions to an IRA while you work; instead, you pay taxes on amounts you withdraw after you stop working.
Who Can Open an Account
Anyone can open and contribute to a traditional IRA as long as the taxpayer earns compensation during a particular tax year. Taxpayers must also be younger than 70 1/2 years old. Forms of compensation include wages, salaries, bonuses, tips and self-employment income. Alimony, nontaxable combat pay and business earnings also count as compensation.
As of the 2014 tax year, you can contribute a maximum of $5,500 per year to a traditional IRA or $6,500 if you are age 50 or older. If you earned less than these amounts in compensation for the year, then that amount represents the maximum for the year. If you contribute less than the maximum amount in one year, you cannot contribute more in following years. Normally, any amount you contribute to an IRA becomes a tax deduction.
Where to Open
Open a traditional IRA at a financial institution or an entity approved by the IRS to act as a trustee for such accounts. The most common places to open an IRA include a bank, credit union, or savings and loan association. The institution must have deposits federally insured. Trustees or custodians of the account make a written agreement with you to maintain the account. Contributions, with the exceptions of rollovers, are made in cash at the financial institution.
An individual retirement account is available in several different varieties that have certain tax advantages. An original IRA, also known as a traditional IRA, allows you to save for retirement while you earn money as you work.
Talk to a financial adviser at your bank to set up a traditional IRA. An accountant or income tax professional can also advise you about the tax benefits of an IRA as you save for retirement.