The traditional IRA is the original individual retirement account.
So what is a traditional IRA?
And when youre deciding between aRoth IRA vs. traditional IRA, does a traditional IRA ever make sense?
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What Is a Traditional IRA?
You dont even need to itemize your deductions to take advantage.
Your money grows on a tax-deferred basis.
Then, you pay ordinary income taxes on it when you withdraw it in retirement.
You choose your own investments when you open either pop in of retirement plan.
How Much Can I Contribute?
The traditional IRA contribution limits are the same as the Roth IRA limits.
If youre 50 or older, youre allowed to make an extra catch-up contribution of $1,000.
Who Can Fund a Traditional IRA?
Earned income sources include:
Social Security, investment income, alimony, child support and unemployment dont count.
Pro tip: Aspousal IRAcan help non-working spouses save for retirement.
you could set it up as either a traditional or a Roth IRA.
When Can I Withdraw Money?
Only your earnings are subject to taxes and the 10% early withdrawal penalty.
Do I Have to Take Money Out of My Traditional IRA?
The IRS requires you to make withdrawals beginning April 1 after the year you turn 72.
Subsequent RMD must be taken by Dec. 31 each year.
The minimum distribution is determined by your life expectancy based on your age and your account balance.
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Traditional IRA Pros and Cons
OK, lets recap.
Here are the advantages and disadvantages of a traditional IRA.
But there are some times when a traditional IRA makes more sense.
You might want to consider a traditional IRA if:
1.
Roth IRA contributions wont lower your AGI.
Youre Hedging Your Bets on Taxes
Retirement planning involves tons of guesswork.
You could hedge your bets by dividing your contributions between a traditional IRA and a Roth IRA.
That way, you get part of the tax benefits now and a tax-free source of income in retirement.
Basically, you open a traditional IRA and convert it to a Roth IRA.
You pay taxes on the money, but you get the tax-free benefits later on.
Warning: Backdoor IRAs can be complicated and should be handled by an experienced CPA.
A lot of people roll their 401(k) into their new employers plan.
Rolling over your balance into a traditional IRA often makes most sense in this case.
Sure, you could roll over your balance to a Roth IRA, but youd owe taxes on it.
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Traditional IRA vs. Roth IRA: Which Do I Choose?
Theres no one-size fits all solution to this question.
The most important rule is to just start saving already.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.
She writes the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected].
