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What Is A Traditional IRA

What is a traditional IRA? This is a tax deferred savings plan originally set up in 1974 to provide a means for employees not provided with a pension plan to have a tax deferred means of saving towards their retirement. Since then employees with pension plans have also been allowed to open IRAs.

The main difference between the traditional IRA and the Roth is income withdrawn from the traditional account is subject to income tax at the time of withdrawal. This is not the case with the Roth. The traditional IRA is also more restrictive with withdrawal requirements allowing withdrawals after the age of 59 ½ and requiring withdrawals after the age of 70 ½. There are however exceptions to this, and early withdrawals can be made without penalty in the event of:

Extreme medical expense

Health insurance premiums

Death

First time home buyers

Higher education (in certain circumstances)

Equal distributions based on life expectancy

At the age of 70 ½ withdrawals are required. This amount of withdrawal is base on life expectancy. If these withdrawals are not made a 50% penalty will be charged on the amount that should have been withdrawn.

Contributions into the traditional account are tax deductible with the limits at the time of publication being $4000 for those under and $5000 for those over 50.

What Is A Traditional IRA, Compare To The Roth IRA

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