Traditional IRAs: Tax Benefits

A Traditional IRA is a retirement savings account that allows individuals to deposit pre-tax income into investments – such as mutual funds, stocks, bonds, or ETFs – and these deposits can grow tax-deferred. Contributions made into a Traditional IRA may be fully or partially deductible, depending on several factors including the taxpayer’s income, tax-filing status and among other factors. In general, assets in a Traditional IRA – including dividend income, earnings and capital gains – are not taxed until a distribution is made by the beneficiary.

Individuals can contribute 100 % of any earned compensation up to a specified maximum dollar amount – deduction limits are determined on an annual basis by the IRS – for current IRS contribution limits click here.

Highlights: Traditional IRA

  • Technically anyone is eligible to open and contribute to a Traditional IRA
  • Contributions made to a Traditional IRA can reduce adjusted gross income whether or not individuals itemize deductions on their tax return
  • Assets in a Traditional IRA can be used to pay for qualified college expenses without paying an early distribution penalty, but you will pay taxes on the distribution
  • Up to $10,000 in a Traditional IRA can used up to $10,000 toward the purchase of a first home without paying an early distribution penalty, but you will owe taxes on the distribution
  • For individuals covered by a retirement plan at work, the ability to deduct IRA contributions may be reduced or eliminated at higher incomes. Read more on this below.

Take Action!

Compare features of Traditional and Roth IRAs, each enables you to save for retirement, but plan differences may impact which is more suitable for your situation

Most pre-retirement payments received from a retirement plan can be “rolled over” into an IRA within 60 days. You can also request your financial institution or retirement plan directly transfer the payment to an IRA.

Learn more about Traditional and Roth IRAs – click here to get more information from the IRS website.

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