WHAT IS THE TRADITIONAL IRA?
The Traditional IRA is an Individual Retirement Account that allows you to invest pre-tax dollars with tax-deferred withdrawals in retirement. It is one of the most popular investment accounts available. You don’t have to pay capital gains tax or dividend income tax until you make a withdrawal A.K.A. take a distribution.
WHO CAN GET A TRADITIONAL IRA?
Any U.S. Citizen 18 or older can qualify for one as long as they earn income. You can choose to open a Traditional IRA with any brokerage that offers one. If you want to be hands off and automated, I recommend Betterment or Wealthfront. If you want complete control in what you invest in, I recommend M1 Finance. If you are an advanced investor who likes to day trade, Webull may be more your speed for a Traditional IRA.
WHAT ARE THE CONTRIBUTION LIMITS?
- The 2022 Contribution Limit is $6,000. You have until April 15th, 2023 (Tax Day) to maximize your contributions for 2022.
- The 2023 Contribution Limit is $6,500.
- If you are 50 or older, you can contribute an additional $1,000 as a “catch-up” contribution.
- You can no longer contribute after you reach 701/2 years old.
- Contribution Limits are not affected by rollovers.
- If you exceed the contribution limits, you will be charged 6% in taxes each year until you fix the overage.
WHEN CAN I WITHDRAW MY FUNDS?
- You can withdraw money for any reason penalty-free at 591/2 years old.
- If you withdraw earnings before 591/2, will incur a 10% penalty fee on your withdrawals.
- Must take minimum required distributions once you reach 701/2 years old
WHAT ARE THE INCOME LIMITS?
To contribute to a Traditional IRA, you need to make at least the amount you contribute. For example, if you retire and only make $1000 per year, you cannot contribute more than $1,000 per year to your Traditional IRA.
HOW MUCH OF MY CONTRIBUTIONS ARE TAX-DEDUCTIBLE?
| 2022 FILING STATUS | Your Modified AGI | Deductions |
|---|---|---|
| single or head of household | =/< $68,000 | Deduct the total amount you contributed. |
| single or head of household | > $68,000 and < $78,000 | Partial deduction. |
| single or head of household | $78,000+ | No deduction. |
| married filing jointly or qualifying widow(er) | =/< $109,000 | Deduct the total amount you contributed. |
| married filing jointly or qualifying widow(er) | > $109,000 and < $129,000 | Partial deduction. |
| married filing jointly or qualifying widow(er) | $129,000+ | No deduction. |
| married filing separately | <$10,000 | Partial deduction. |
| married filing separately | $10,000+ | No deduction. |
CAN YOU HAVE BENEFICIARIES?
You can have beneficiaries for your Traditional IRA. The Traditional IRA is usually left to the surviving spouse. This person can choose to receive distributions or rollover the money into their own personal IRA. A child receiving the IRA will be taxed at the highest tax rate their parents fell under.
- Taxes will still be owed on an inherited IRA when distributions are made.
- Inherited IRA’s have required minimum distributions.
ADVANTAGES & DISADVANTAGES
| Advantages | Disadvantages |
|---|---|
| Your contributions are Tax-Deductible | May not be tax-deductible, or may be partially tax deductible if you have a 401k and make a certain amount of money. Source. |
| Can be converted to a Roth IRA. You can make non-tax-deductible contributions if you want to, but will need to keep track of them. | Low Contribution Limits |
| You have more investment options than a 401k. | You can no longer contribute after you reach 701/2 years old. |
| Not employer-sponsored. You have the flexibility to open and maintain this account with almost any brokerage. | Must take minimum required distributions once you reach 701/2 years old, otherwise you will be penalized up to 50% on your minimum required distributions. |
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