What Is A Traditional IRA?

What Is A Traditional IRA?

This type of account has contribution limits (under the 2010 rules, you could invest $5K/year if you are 49 or younger, and $6K/year if you are 50 or over). This type of account also has income limits, so you should check to see if you make too much money to qualify (2010 limits ranged between $56K – $66K for single filers, and between $167K – 177K for joint filers, meaning that if you made less money than the low-end of the range you could invest fully in the account, and if you fall somewhere in the range you may be able to invest a portion of the limits into the account).

There are two major benefits of this type of account: Tax-Deferred Gains, and the contributions are Tax-Deductible. Tax-Deferred means is that if your $3,000 contribution grew at 10% for 20 years, you would then have just over $20,000 without ever paying a dime of taxes. You will only be taxed on the income when you withdraw the money during retirement. By not paying taxes throughout your working years, the money accumulates much quicker, and your retirement pot grows more rapidly. Tax Deductible contributions mean that if you put in $3,000 dollars, you will actually get to write off $3,000 off of your taxable income for the current tax year. For example, if you are in the 15% tax bracket, you would owe approximately $450 less in taxes if you made a $3,000 contribution. Between these two advantages, this account is generally a great match for anyone who qualifies for this account.

Retirement Junkie is a website that the Hagopian Institute put together as a source for free information to help people prepare for retirement.  Please visit retirementjunkie.com, and follow MrEmergingMedia on Twitter for more retirement tips, along with other fun offerings from Todd Hagopian and the Hagopian Institute.

About Todd Hagopian (@ToddHagopian)

Todd Hagopian received his BA from Eastern Michigan University with a major in Political Science. After graduation, he worked as a Financial Advisor and a Bank Manager before returning to school. He attended Michigan State University, where he completed an MBA with a double-major in Finance and Marketing. Todd is now a Senior Product Development Manager for a Fortune 500 company. He frequently writes about business issues, social media strategy, and political issues that he finds important. Enjoy the blog!

Posted on December 19, 2011, in Investing and tagged , , , , , , . Bookmark the permalink. Leave a comment.

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