Traditional, Roth, SEP, IRA; so many terms, types and forms can have you turned upside down in no time. But quiver not as I have the key that will decipher the jargon and give you a crystal-clear understanding.
That way you can confidently select the best retirement account based on your needs. You can do this, and I won’t leave you hanging! The best way to digest this is to dive right in, so let’s get started!
A traditional IRA is any IRA that is not Roth IRA or Simple IRA. Whew, ok now that was easy! Lol, but before I let you leave with that tantalizing bit of info, I want to make sure you know what a Traditional IRA entails and how you can use it to your advantage.
The individual retirement account (IRA) will allow an individual to contribute pre-taxed money into a retirement account and because of this the account can continue to grow, while being tax deferred until you reach the age of withdrawal.
You can easily open up this type of account through your financial advisor, online broker etc. but the account must be maintained by a trustee or a custodian.
So, first things first, who can set up a Traditional IRA? The good news is that anyone can open one as long as you receive income that is taxed throughout the year. As long as you have a job and get a paycheck from an employer or work as a freelancer and receive taxable funds, you are eligible to set up and contribute into the Traditional IRA.
Now that info is pretty straightforward.
So, what next? You’re now probably wondering, since you have set up your IRA, how much can I put into it? Well, my friends, there are two answers to that question and they are solely based on your age.
f you are under the age of 50, then you can contribute to your Traditional IRA in the amount of $6,000 annually. If you are older than the age of 50, then you will be able to contribute up to $7,000 yearly. The reason why being 50 or older allows you to contribute the additional one thousand dollars is that there is a catch-up boost for older people seeing as how they will be reaching retirement sooner than those under the 50-year age threshold.
Another thing that you might have to consider would be if you are married, as there are limits to what you both can contribute to in your separate retirement accounts and you will not be able to participate in the same IRA. The really great thing about contributing to your Traditional IRA, is that the money that you add to your account is tax deductible! Yes, you read that right folks; tax deductible and those are the magic words you want to hear.
This means that whatever contributions you put into your account for the IRA can be claimed as a deduction on your income tax return and even more importantly, the IRS will not apply any income taxes to those amounts.
Of course, it will be a different story when someone goes to actually withdraw those funds but were not talking about that particular part just yet. Just bask in that fact and see, the perks are starting to add up already!
Another important question that you might be wondering about is when can I contribute to my Traditional IRA? Well friends, putting funds into your retirement account can be done anytime throughout the entire year. You are even able to deposit funds well up into the due date for filing the tax return for that year. The only downside is if you file for an extension, which is perfectly normal, you cannot continue to make contributions for that time period. In short, the contributions must be made by the tax filing deadline, but still that a pretty broad time-frame.
Finally, we get to the meat and potatoes of the information. You might be wondering when you can take out all that money you have been squirreling away, or can I take out money earlier and will there be any potential penalties with doing so? Well, there is good news and okay news when it comes to the distribution part of the Traditional IRA.
The good news is that you can start drawing out of the traditional IRA when you hit the age of 59 ½ years old or young, depending on how you look at it. The bad news is that there is a catch to withdrawing from your IRA if you under the age minimum. If under 59 ½, then you will assessed a fee of 10% in early withdrawal fees. Of course, with everything there are a few exceptions to this particular penalty and those are if you are withdrawing for a first-time home purchase, to fund your education or purchasing health insurance, or a CARES Act related distribution just to name a few. For everyone else who is of age, when you do take out money from your Traditional IRA, you will be subject to income tax as is standard because you already know that Uncle Sam is patiently waiting for his cut.
But, after that and when it’s all said and done, it is your money to do with as you please. Hello beach resort life! Am I right?… Well moving on.
See, now was that so horrible to talk about? Traditional IRA’s really are not that difficult to understand. By now, you have learned that with the help of a custodian or trustee broker, you can start saving for your retirement. There are also limits to what you can contribute to your retirement account and that will be dependent upon your age and marital status.
You can use it any time you want, but there will be penalties, if you touch it before the age minimum. When you do reach the eligible age, you can start taking distributions from the account, but just know that it will be taxed as income, but as we know that is too be expected with any money you receive. I mean, we all know there is no escaping taxes, and it will get you on either end of the process.
In the end, the Traditional IRA was created to help anyone save money for retirement. No one wants to work forever, so by creating and contributing to an IRA, you will be helping your future self, when you decide you are ready to retire. Retirement planning today will make the actual event less stressful and make you more confident to move into the next phase of your life.
If it is still a bit more for you to do, all of this can be done with the help of a tax strategist or CPA and you have both of those in me! Just reach out to Accolade Accounting when you are ready to start and I promise you it will not be as hard as you might be thinking.
Traditional IRA not quite the retirement account for you? Check back with us for the next blog post where I will discuss what a Roth IRA is.
Until next time friends!
Cheers!
JD Longino, CPA
