Question: Traditional IRA
Answer: A Traditional Individual Retirement Account (or Traditional IRA for short), is a special type of account which allows investors to make tax-deductible contributions. The money can be invested in stocks, bonds, mutual funds, etc., and the earnings grow tax-free until the account's owner turns 59 1/2 years old (if money is withdrawn before this age, a 10% penalty is incurred). At this time, the account holder is allowed to begin withdrawing money from the account to fund their retirement. The distributions are fully taxed by the U.S. government. Money must be withdrawn from the account no later than the April 1 following the year the owner turns 70 1/2.
The traditional IRA was essentially the only choice until the late 1990's when Congress passed the Taxpayer Relief Act of 1997, at which time the Roth IRA was created.
Traditional IRA Profile
- Tax deductible contributions (depending on income level)
- Withdrawals begin at age 59 1/2 and are mandatory by 70 1/2.
- Taxes are paid on earnings when withdrawn from the IRA
- Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
- Available to everyone; no income restrictions
- All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to certain exceptions).
