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What Is a Traditional IRA and What Are the Benefits

 

You should ask the important question, "What is a traditional IRA?," before opening your retirement plan. With proper information and knowledge about a traditional IRA, you will manage your personal finances well into your retirement.

Traditional IRA as a Retirement Plan

A traditional IRA is a retirement plan that's opened to save money on pre-tax contributions. Taxes will only be paid at the start of fund withdrawals. You can open an IRA at your local bank, a brokerage company or a mutual fund company. Funds in this account will be invested in mutual funds, stocks and bonds.

Terms of Withdrawal                                           

When the account holder turns 59.5 years old, he can start withdrawing from this retirement fund. The mandatory age for withdrawal is age 70.5. The account holder must withdraw his money even if he does not need it and is subject to being taxed, as it is treated like ordinary income. Withdrawal before the allowed age is also subject to a penalty of 10 percent.

Benefits

One benefit of the traditional IRA is the tax advantage you get. Contributions made to your account are subtracted from your gross income before your income is taxed. Another benefit is getting a lower tax rate on your fund withdrawals. By the time you retire and when you start using your IRA, the tax rate applied will be much less than the tax rate when you still had a job, considering that you are not earning anymore.

Getting an IRA is the first step to having a worry free retirement. The younger you are, the better it is to begin planning for your golden years.

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