Mar 29 2011

What is an IRA? What is a traditional IRA?

Category: Finance

Answer:

Traditional IRAAn IRA is an acronym that stands for Individual Retirement Account. It is essentially a type of savings/investment/retirement account that offers individuals certain tax advantages. A traditional IRA allows anyone under 70 ½ years of age to contribute pre-tax income up to certain contribution limits. The key advantage of a traditional IRA is that most, if not all, of the contributions you make will reduce your tax basis (taxable income) as well as grow tax-deferred. You’ll also be able to choose the investment options within your IRA account. Any gains from the investments in the account will not be taxed until the account holder starts taking distributions, at which point they would be taxed as ordinary income.

Traditional IRA Contribution Limits for 2011

Age 49 and under may contribute a maximum of $5,000.00 in 2011. Age 50 to 70 may contribute up to $6,000.00 in 2011. If you make over a certain amount and/or have employer based retirement account contributions you may not be eligible to add funds to a Traditional or Roth IRA.

Withdrawing from your IRA without Penalty

There are certain restrictions for withdrawing money from a traditional IRA that should be noted. Any distributions made before the age of 59 ½ will be taxed as well as penalized. There are a few notable exceptions to the penalties including:

  • Distributions for medical expenses
  • Distributions for medical insurance
  • Distributions if you are disabled
  • Distributions if you are a beneficiary of a deceased IRA owner
  • Distributions for college expenses
  • Distributions if you are buying your first home
  • Distributions for military personnel

Other Types of IRAs

There are also other IRAs that offer similar retirement savings options, including:


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