Traditional IRAs are the oldest and most flexible type of individual retirement account (IRA). Available since 1975, Traditional IRAs now hold $7.85 trillion dollars, which is about 85% of all IRA assets1 – and for good reason. Here are 10 things you should know about Traditional IRAs:
Almost anyone can have one. To be eligible to contribute to a Traditional IRA, you just need to be younger than age 70½ and have earned income (or be married to someone with earned income).
1. Your IRA investments grow tax-deferred. You generally do not have to include your investment earnings in your taxable income until you take a withdrawal from your IRA.
2. You have a wide range of investment options. There are many permissible IRA investments. Savers who choose a self-directed IRA, also known as an alternative IRA, have the flexibility and control to invest in almost any type of investment, including real estate, precious metals, private equity and more.
3. You can contribute a significant amount. You can contribute $5,500 to your Traditional IRA for 2018, or $6,500 if you’re age 50+. These limits are increased periodically based on the cost-of-living. Contributions to Traditional IRAs and Roth IRAs are combined when calculating this limit.
4. Most contributions are deductible. If you do not participate in an employer’s retirement plan, all of your contributions are deductible. If you do participate, your income must fall within to be eligible for the deduction. Being able to reduce your tax liability in the year of contribution and delay taxation on both the contribution amount and the earnings, until the amounts are actually distributed, are key incentives to contribute to a Traditional IRA.
5. You can contribute, even if you can’t deduct. If your income level prevents you from taking a deduction, you can still contribute to a Traditional IRA. It’s called a nondeductible contribution, and you won’t have to pay tax on that money again when you take it out of your IRA.
6. Distributions will be taxed pro rata. If you have nondeductible contributions in a Traditional IRA, you cannot withdraw just the tax-free money. All Traditional IRA withdrawals will consist of a proportionate amount of taxable assets (deductible contributions and earnings) and nontaxable contributions, based on all of your Traditional, SEP and SIMPLE IRA account balances.
7. You can use your IRA to consolidate retirement savings. You can transfer or roll over pre-tax assets from among your IRAs. You can also roll over dollars from other eligible employer plans (e.g., 401(k), profit sharing, 403(b), governmental 457(b), Thrift Savings plan) into your IRA. Rollovers and transfers are tax-free and do not affect the amount you are eligible to contribute in a year.
8. You can withdraw your IRA assets at any time. If you are younger than age 59½, an additional 10% early distribution tax will apply unless you meet an exception.
9. Mandatory distributions begin at age 70½. When you reach age 70½, the IRA rules require you to start taking a required minimum distribution (RMD) from your Traditional IRA each year.
Before you establish or move retirement savings to a Traditional IRA, it is important to talk to your financial advisor or tax professional to make sure you understand all the tax rules and other requirements that will apply to your IRA. You may also contact us at 866-928-9394 or Service@StrataTrust.com with questions about funding a self-directed Traditional IRA.
1 Investment Company Institute, The US Retirement Market, First Quarter 2018, June 21, 2018