Traditional IRA - Individual Retirement Account (IRA)

A traditional IRA is a type of individual retirement account (IRA) that allows individuals to make tax-deductible contributions to the account, meaning that the money they contribute reduces their taxable income for the year. The money in the account then grows tax-free until withdrawal, at which point it is taxed as ordinary income.

One of the key benefits of a traditional IRA is that it allows individuals to lower their taxable income in the year the contributions are made, which can result in lower tax liability for that year. The money in the account can then grow tax-free over time, potentially resulting in significant savings for retirement.

However, there are also some restrictions and limitations associated with traditional IRAs. For example, individuals must start taking required minimum distributions (RMDs) from their traditional IRAs at age 72, which means that they are required to withdraw a certain amount of money from the account each year, regardless of whether they need the money or not. RMDs are taxed as ordinary income, which can increase an individual's tax liability in retirement.

In addition to RMDs, traditional IRAs also have contribution limits, which can vary depending on the investor's age and income level. As of 2023, the contribution limit for a traditional IRA is $6,000 for individuals under the age of 50, and $7,000 for individuals over the age of 50. Traditional IRAs also have income limits, which can affect an individual's ability to deduct contributions from their taxable income.

It's worth noting that traditional IRAs may not be the best option for everyone. For example, individuals who expect to be in a higher tax bracket in retirement may be better off with a Roth IRA, which allows for tax-free withdrawals in retirement. Additionally, individuals who have already maxed out their contributions to other tax-advantaged retirement accounts, such as 401(k)s, may not be eligible to contribute to a traditional IRA.

Overall, a traditional IRA can be a powerful tool for individuals looking to save for retirement and lower their taxable income in the process. However, it's important to carefully evaluate the pros and cons of a traditional IRA and to choose an account that aligns with one's financial goals and individual circumstances.