Traditional IRAs allow eligible contributors to deduct contributions from their income tax bill and invest money that grows tax-deferred, though withdrawals will eventually be taxed when taken out in retirement.
This account type can be an ideal solution for those expecting to fall into lower tax brackets in retirement, but may prove riskier for those currently in a higher tax bracket.
Deductible
As its name implies, a traditional IRA allows you to deduct contributions from your tax bill each year, making investing easier during working years and helping build up an adequate retirement nest egg without needing additional sources of income in retirement.
How much you can deduct from an IRA depends on several factors, including your income, earnings and whether or not you have access to an employer-sponsored retirement plan. Each year the IRS sets limits for deductible IRA contributions; these amounts vary from person to person. Married couples can contribute as a joint entity but will only claim as much deduction depending on combined income and modified adjusted gross income (MAGI).
Traditional IRAs provide many tax benefits in addition to an upfront tax break, including deferring taxes until withdrawal time – an invaluable advantage over holding assets in taxable accounts, where any gains or interest accrue will incur taxes immediately.
Don’t fret if your contributions don’t qualify for tax deduction. A non-deductible IRA offers similar savings opportunities; just remember that any earnings on investments within it remain tax-deferred.
But the good news is that you can continue contributing to an IRA up until age 70 1/2, even if you do not qualify for tax deduction. And if there’s money still sitting in there that you no longer require by then, withdraw it without incurring taxes or penalty payments.
Are You Starting Retirement Saving? Working with an experienced financial professional is key to opening the right account for you. NerdWallet’s rankings of online brokers and robo-advisors take into account over 15 metrics such as fees/minimums/investment choices/mobile app capabilities/customer support as well as our retirement calculator’s free retirement savings goal calculator can assist with calculating how much to save each year to ensure a comfortable future – this content serves only as general guidance, it should not serve as a replacement for seeking advice from qualified financial professionals.
