A Traditional Individual Retirement Account (IRA) is a personal account that allows you to save for your retirement on top of employer sponsored plans like 401(k), 403(b), and 457 plans.
Key aspects of Traditional IRAs:
- They are a pre-tax investment account, meaning that the money you place in this account, you can take a deduction on your taxes, reducing your income for the year you put money in your IRA account.
- With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.
- In 2021, the yearly contribution limits are $6,000 per year for those under age 50. People 50 and older can make an additional $1,000 catch-up contribution.
- Investment options are almost anything- individual stocks, mutual funds, ETFs, annuities, UITs, etc. There are investment vehicles that are not allowed in IRAs, including Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins.
- Fees vary from institution to institution. It is crucial to understand how much you are paying in fees.
- Investment control is either by your chosen institution or advisor or can be self-directed. With this type of account, you must be aware of your risk tolerance and diversification strategy. These are especially important if you are self-directed, and you need to make changes to your investments as you make changes to your life and risk tolerance.
- The earliest you can make penalty-free withdrawals is 59 ½. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased IRA owner or the withdrawal is the result of an IRS levy.
- Required Minimum Distributions (RDMs) need to start April 1 of the year following the calendar year in which you reach age 70½, if you were born before July 1, 1949, or April 1 of the year following the calendar year in which you reach age 72, if you were born after June 30, 1949. RMDs are required even if you are still working.
- Rollovers into Traditional IRA can come from other pre-tax accounts such as SIMPLE IRA (after two years being open), 401(k) accounts, 403(b) accounts, and 457(b) accounts.
- You can convert funds from a traditional IRA to a Roth IRA. You will owe taxes on the converted money, but the funds will not be taxed at distribution, and Roth IRAs don’t have RMDs.
- If you have both a Traditional IRA and a Roth IRA, your contribution limits between the two are $6,000 per year for those under age 50 and $7000 for people 50 and older.
- There are no income limits to open and contribute to a Traditional IRA.
- But there are deduction income limits for individuals and spouses who also have an Employer Sponsored Retirement Plan at work, i.e., 401(k) plans, 403(b) plans, 457(b) plans. Single or head of household filers get a full deduction if their modified adjusted gross income (MAGI) of $66,000 or lower, a partial deduction for an MAGI between $66,000-$76,000, and no deduction for an MAGI above $76,000. For joint filers with each spouse having their own employer sponsored retirement plan, they get a full deduction for a MAGI of $105,000 or less, partial deduction for A MAGI between $105,000 -$125,000, and no deduction for a MAGI above $125,000. For joint filer where only one spouse has an employer sponsored retirement plan, they get a full deduction for a MAGI of $198,000 or less, partial deduction for a MAGI between $198,000 -$208,000, and no deduction for a MAGI above $208,000.
Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.