A traditional individual retirement account (IRA) lets people invest their pre-tax income, allowing it to grow without immediate tax. The IRS does not tax capital gains or dividends until the money is taken out. Individuals can contribute from their eligible earned income.
There might be income limits to consider. Depending on a person’s income, tax-filing status, and other details, contributions to a traditional IRA could be tax-deductible. People saving for retirement can set up a traditional IRA with their broker, whether it’s an online broker, robo-advisor, or a financial advisor.
How Traditional Individual Retirement Account Works?
Traditional IRAs allow people to put in money before taxes into a retirement investment account. The money can grow without taxes until it’s taken out after the age of 59½. Banks and brokers take care of traditional IRAs and invest the money based on the account holder’s instructions and the options available.
Most of the time, contributions to traditional IRAs can be deducted from taxes. For example, if a person puts $6,000 into their IRA, they can subtract that amount from their income tax return and the IRS won’t tax those earnings. However, when they take money out of the account in retirement, the earnings are taxed at their regular income tax rate.
The IRS limits how much you can contribute to a traditional IRA every year based on your age. In 2023, the contribution limit is $6,500 for those under 50, and $7,000 in 2024. If you’re 50 or older, you can contribute more through a catch-up provision, adding an extra $1,000. So, the total limit is $7,500 in 2023 and $8,000 in 2024.
The SECURE Act of 2019 removed age limits for contributing to a traditional IRA. If the account holder has earned income, they can contribute to a traditional IRA no matter their age.
Conclusion
The traditional IRA is a popular way to save for retirement. It lets you put money in before taxes, and you won’t pay taxes on the growth until you take the money out after 59½.