Traditional IRAs — An upfront tax deduction and tax-deferred growth

Yes, it really is called a “Traditional” Individual Retirement Account (IRA), but there’s nothing old fashioned about how it works. If you want an upfront tax deduction today, and you think your income tax rate will be lower when you retire, a Traditional IRA may be the IRA for you. Its alternative, the Roth IRA, has distinct differences that may make it preferable in other situations. We’ll talk about that later.

Key Features

• No contribution restrictions based on income. If you have employment related income you can make contributions regardless of the amount of your income.
• No upper age limit for contributions. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 removed the old 70.5 age limitation.
• Upfront tax deduction. If you fall below a certain modified adjusted gross income (MAGI), you receive a tax deduction on the money you put in, which may put you in a lower bracket or help you qualify for other tax incentives. There are charts of income limits here.
• Maximum contributions. In tax year 2021, you can contribute yearly up to $6,000, or $7,000 if you are age 50 or older.
• Income tax due on withdrawals. You pay income tax when you take the money out. If you are under 59½, you will have to pay income tax plus a 10% early withdrawal penalty unless you qualify for an IRS exception.
• Withdrawal age requirement. You must start taking minimum withdrawals at age 72 (another change due to the SECURE Act).
• Early withdrawal penalty exemptions. Up to $10,000 can be withdrawn for first-time homebuyer expenses without paying the 10% penalty. Other exemptions could apply for medical bills, insurance premiums, education expenses, death, disability, “substantially equal payments,” and for certain distributions to military reservists called to active duty. Check out the IRS website or consult with your tax advisor.

Remember that an IRA is a retirement account you would set up yourself, not an employer-sponsored plan.