We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Traditional IRA?

Margo Upson
By
Updated: May 17, 2024

Traditional IRAs are a way to save for retirement. IRAs, or individual retirement accounts, provide tax advantages when setting money aside to fund expenses for after you leave the work force. The money is either saved, with interest, or can be invested in real estate, stocks, or other areas.

The most common way to get a traditional IRA is to take advantage of the retirement program that most employers have. In these plans, money is deducted from your paycheck before taxes are figured, and put into your IRA account. Most employers will match this amount, at least partially. A common amount for companies to contribute is 3% of your total pay. Traditional IRAs are also available through many banks, brokerage firms, and other financial institutions.

Contributions to a traditional IRA account cannot exceed $5,000 US dollars (USD) per year, or 100% of your total income, whichever is less. Contributions to a joint account, for a married couple, cannot exceed $10,000 USD. For those over 50 years of age, the limit is $6,000 USD. These amounts continue to rise to compensate for inflation. Yearly contributions can only be made between the first of the year and the tax deadline of April 15th.

Once money is in an IRA, it can be used to invest. Different financial institutions allow for different types of investments. For example, a bank may allow Certificates of Deposit, and a brokerage may allow for investment in mutual funds or annuities. Money in an IRA account earns interest and dividends, along with any gains seen from investments.

The earliest that money from a traditional IRA can be taken out without penalty is at 59 ½ years of age. Before this, there is a 10% penalty for all withdrawals. Unlike other types of IRA’s, the recipient must begin regular withdrawals before reaching 70 ½ years of age. If they fail to do this, half of the mandatory amount will be seized by the IRS.

There are many reasons why one might choose a traditional IRA over other types. If there is a chance that you will be in a lower tax bracket after retirement, a traditional IRA can save you money, because the money is not taxed until it is removed. Also, there is a chance that the government will choose to tax all IRAs upon withdrawal in the future, which will not affect traditional IRAs that are already being taxed. Another advantage is that, for most, contributions to these IRAs are tax-deductible.

It is estimated that retirees will require 70% of their regular income to live comfortably in retirement. For that reason, it is important to start contributing to an IRA as early as possible. Discussing your options for IRA accounts and investments will give you an accurate idea of what options will best meet your needs.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Margo Upson
By Margo Upson
With a vast academic background that has ranged from psychology and culinary arts to criminal justice and education, Margo Upson brings a wealth of knowledge and expertise to her role as a WiseGeek writer. Her wide-ranging interests and skill at diving into new topics make her articles informative, engaging, and valuable to readers seeking to expand their knowledge.
Discussion Comments
Margo Upson
Margo Upson
With a vast academic background that has ranged from psychology and culinary arts to criminal justice and education,...
Learn more
Share
https://www.wisegeek.net/what-is-a-traditional-ira.htm
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.