Traditional IRAs provide tax-deferred growth, and can even be used alongside employer-sponsored retirement accounts like 401(k). Your contributions may even qualify for a tax deduction depending on your income level.
Distributions made before age 59 12 may be subject to both income taxes and typically a 10% penalty, except in the cases of first-time home purchases or qualified medical expenses.
Taxes
IRAs offer many advantages, from tax deductions up front to postponing income taxes until withdrawal in retirement. If, however, an unqualified distributions (UBTIs) occur from your IRA – such as interest and dividend payments as well as capital gains – then income taxes must be withheld from it as unqualified distributions (UBTI).
If you have multiple beneficiaries, splitting your traditional IRA into individual accounts may help avoid early withdrawal penalties after your death and give each beneficiary access to it without incurring penalties, according to NerdWallet. By doing so, these assets can provide their beneficiaries with flexibility when using funds penalty-free.
Splitting an IRA exposes each account to required minimum distributions (RMDs) based on the age of its beneficiary, potentially increasing RMDs more than would otherwise have been required if left whole. Furthermore, joint accounts could require distributions that exceed what can be afforded at once which could incur costly IRS penalties.
Fees
Traditional IRAs are an excellent choice when looking to preserve an immediate tax deduction when rolling over workplace retirement plans. Offering more investment options and lower fees than employer-sponsored plans, traditional IRAs allow you to maximize savings and deduct contributions up to your Modified Adjusted Gross Income (MAGI) limit; any contributions beyond this threshold will incur a 10% penalty fee unless an exception applies.
Multiple IRA accounts can increase diversification while helping you manage investments and withdrawals more efficiently. Consolidation accounts is another option to save costs and facilitate convenience; however, some providers charge fees when moving assets from one account to the other; it’s wise to check before initiating transfers as these fees could accumulate over time. Furthermore, certain custodians don’t recognize separate beneficiaries on separate IRAs so it may be prudent to establish each beneficiary with their own account.
Investment options
IRAs provide investors with a broad array of investment choices. You can invest in individual stocks and bonds, mutual funds, real estate investment trusts (REITs), private equity investments and more – but keep in mind that your annual contributions across all accounts cannot surpass the maximum limit set.
TD Ameritrade’s Traditional IRA account offers an impressive range of investment choices, from commission-free ETFs and no transaction-fee mutual funds1 to fixed income products and more. Plus, our dedicated education team, exclusive videos, and helpful tools make creating your retirement plan easy.
Consolidating IRAs may simplify your tax situation and make it easier to understand your overall investment mix, but before making this decision, it is wise to carefully consider both its pros and cons. Consolidation may make sense in certain instances; for instance if you rollover multiple 401(k)s from past employers into separate IRAs; it might help avoid penalties associated with withdrawing withdrawals before age 59 1/2 by keeping pretax and aftertax accounts separate.
Beneficiaries
After the death of an account holder, their traditional IRA becomes an “inherited IRA.” Depending on its title, its beneficiary may owe income tax for withdrawals made during their ownership.
Beneficiaries who withdraw funds from an inherited IRA before age 59 1/2 will incur a 10% early distribution penalty due to it being considered part of their estate and subject to probate proceedings.
To avoid this situation, many people choose to name a trust as the beneficiary of an IRA instead of an individual or another entity. This allows a trustee to manage the assets and delay required minimum distributions (RMD) until their beneficiaries reach life expectancy. A trust can also work around beneficiary ownership limitations that prevent minors or those with special needs from qualifying for government benefits; additionally, it offers investment diversification by spreading assets among robo-advisor-managed IRAs and brokerage accounts offering stock trading.
