A traditional pretax IRA allows you to save for retirement tax-deductibly. Your money grows tax-free until you withdraw it at age 59 1/2 or later.
An Individual Retirement Account, or IRA, can supplement the investment options available in an employer-sponsored plan such as a 401(k). You could also take advantage of one of many robo-advisors to benefit from low-cost, diversified investing tailored specifically to your time horizon and risk tolerance.
Tax Deductions
Traditional IRAs provide one of the primary attractions for saving on an tax-deducted basis; any contributions you make can be deducted on your income tax return, while investment growth remains tax-deferred until it’s time to withdraw it in retirement.
Your ability to contribute to an IRA depends on several factors, such as your filing status, total income for the year and whether or not either you or your spouse is covered by an employer-sponsored retirement plan such as a 401(k). Single filers who don’t participate can qualify for up to a $6,500 deduction.
Alternatively, self-employed individuals should consider opening a SEP IRA or SIMPLE IRA to maximize your deduction. Keep in mind that required minimum distributions (RMDs) still must be paid when withdrawing any contributions and earnings from an IRA; NerdWallet rates these accounts based on account fees and minimums as well as investment choices available, customer support services available and mobile app capabilities.
Tax-Free Withdrawals
Traditional IRAs provide tax breaks on contributions made, with tax-deferred growth over time; however, withdrawals in retirement will incur income taxes due to withdrawal taxes being due from this account.
If you withdraw funds from your traditional IRA before turning 59 1/2 without an allowable exception, an early withdrawal penalty of 10% in addition to ordinary income taxes will apply.
One exception is if funds are withdrawn to cover qualified higher education expenses. You may also avoid penalty by withdrawing funds to buy your first home or cover certain unreimbursed medical expenses.
Financial advisors can assist with selecting the appropriate retirement plan based on your situation and goals, including helping to transfer 401(k) balances to an IRA account or invest with one of many robo-advisors that offer traditional IRA accounts. Furthermore, self-employed business owners will find great advice from financial advisors when it comes to tax-advantaged investments for their business.
Investment Choices
IRAs offer investors many investment options, including stocks, bonds, mutual funds and ETFs. Some brokerage firms and robo-advisors even provide pre-built portfolios that make investing effortless.
Target-date funds offer another method of investing, automatically moving towards the year in which you plan to retire. They help diversify your assets by mixing riskier stocks with safer bonds or CDs; stocks have greater potential over time but also greater volatility.
Individuals and small-business owners alike can open traditional IRAs, SEP IRAs and SIMPLE IRAs. While these plans have lower contribution limits and no catch-up contributions, they still allow access to an impressive selection of investment options – Firstrade offers commission-free trading of stocks and ETFs and provides access to no transaction-fee mutual funds among others.
Flexibility
Traditional IRA accounts offer investors a range of investments that they can select from for their accounts. Plus, traditional IRA account holders don’t pay taxes until withdrawing or “distributing” earnings – likely during retirement years.
An IRA can help you accumulate wealth more rapidly than saving in a taxable brokerage account, which requires annual taxation of investment gains. Furthermore, you have the flexibility to contribute whenever best suits your budget and goals.
However, if your workplace offers matching contributions through a 401(k), prioritizing those funds may be more advantageous than contributing to an IRA due to tax deductions and deferred income streams provided through it.
