A recent survey found that 64% of Americans will retire with $10,000 (or less). Even worse, 48% don’t care.
Of course, there’s no one-size-fits-all answer for how to plan for retirement. But experts agree that starting small — even taking baby steps — is the key to securing your financial future.
This brings us to our topic of the day: What is a traditional IRA?
Keep reading to learn the benefits of traditional IRAs and see if it could be a good solution for you.
What Is a Traditional IRA?
A traditional IRA is an individual retirement account where you contribute pre-tax dollars. It’s one of the most flexible types of retirement accounts with many different savings opportunities.
When you open an IRA from a broker, you can invest in various stocks and bonds. If you go through the bank, you’ll have your choice of savings accounts or Certificates of Deposit (CDs). How much you’ll earn or lose each year depends on how you choose to invest.
If you’re younger than 50, you can contribute up to $6,000 per year to your IRA account. Those over 50 can add up to $7,000 each year. You or your spouse must have earned income to contribute, not unearned income — you can learn the difference at https://bogartwealth.com/what-is-unearned-income/.
Pros and Cons of Traditional IRAs
One of the biggest benefits of traditional IRAs is that your contributions are usually tax-deductible.
For example, if you earn $50,000 per year and you contribute $6,000 to your IRA, your taxable income for that year drops to $44,000. This is because you’ve already paid taxes on the money going into the account.
More good news: There are no income requirements or limits to open or contribute to a traditional IRA.
In addition, you can use your IRA money to pay for qualified college expenses. You can also use up $10,000 towards the purchase of your first home. In both cases, you’ll pay taxes on the distribution, but there’s no penalty for withdrawing the funds.
Although there are many benefits of traditional IRAs, there are some downsides too. The two biggest are the lack of flexibility and the tax penalties for early withdrawal.
If you take out any funds before the age of 59.5, you’ll pay both taxes and a 10% early distribution penalty. There are a few exceptions to this rule, but not everyone will qualify as an exception.
You’re also required to begin taking required minimum distributions starting at the age of 72. This works differently than Roth IRAs, which don’t have any distribution requirement.
Finally, you need to consider whether an IRA will interfere with other employer-sponsored retirement plans. If you have a high income, this could reduce or even eliminate your ability to deduct IRA contributions.
How to Plan for Retirement: Start Today
Like any type of savings plan, there are pros and cons to traditional IRAs.
If you think it could be a smart move for you, don’t delay! It’s never too early to start thinking about retirement and planning for your financial future.
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