The Pros And Cons Of A Traditional IRA
The traditional IRA is one of the most common forms of government approved tax deferred investments. This type of IRA has been around since 1975, and offers people an opportunity to realize a tax benefit on investments put aside for retirement. There are many other options available for your retirement savings, such as Roth IRAs and annuities. Before you make a choice, it’s important to understand the benefits as well as the disadvantages of a traditional IRA.
The Pros Of A Traditional IRA
The most obvious and biggest advantage to choosing a traditional IRA is that you will see an immediate tax benefit. This is because traditional IRA contributions are tax deductible. When you do your taxes for the year, you will be able to deduct the amount of your IRA contribution. For many people this is a very important consideration.
The traditional IRA will defer the taxes on the income that you contribute, allowing you to put off paying income tax on that amount. If you expect to retire in a lower tax bracket than where you currently are, you will pay a lower tax amount on that money when you do withdraw it than you would have otherwise. This means that in the right situation a traditional IRA can save you money on taxes at both ends-when you contribute and when you withdraw.
The Cons Of A Traditional IRA
All of the withdrawals you make from your traditional IRA will be treated as income and taxed as such when you withdraw. In addition to this, you will be charged a penalty by the IRS if you withdraw from your traditional IRA prior to 59.5 years of age.
Traditional IRAs have a required disbursement that begins at the age of 70.5, which is in contrast to a Roth IRA in which there is no requirement for disbursement. There are other requirements and mandates attached to a traditional IRA including eligibility requirements for the tax deduction. All of this can sometimes confuse investors and discourage them from investing in the traditional IRA in favor of the less restricted Roth IRA.
A traditional IRA may be right for you if your financial situation meets certain criteria. The best way to know this is to discuss your situation and your options with your financial advisor, who can explain all of the details of your choices and help you determine what will work best based on your particular retirement goals and current financial status.