Traditional

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What is a Traditional IRA ?

by Kristin Sinclair – A Accu Tax – November 1, 2018

An IRA is an Individual Retirement Account that you set-up with a financial institution, often with the help of a financial professional. One of the first and most popular IRAs is the Traditional IRA; which is also known as the Original IRA. The Traditional IRA is a tax-deferred retirement savings account. That means you normally do not pay current income taxes on your contributions, and only pay taxes on your money later when you make withdrawals in retirement. By deferring taxes, any dividends, interest payments, and capital gains can compound each year without being hindered by taxes. Thus the Traditional IRA has the opportunity to grow much faster than a taxable account. Often retirees find themselves in a lower tax bracket than during their pre-retirement working years. Then the Traditional IRA funds should be withdrawn and taxed at a lower rate.

 

Traditional IRAs come in two varieties: deductible and nondeductible. Qualifying for a full or partial tax deduction typically depends on your income, and whether you or your spouse have access to an employer sponsored retirement account like a 401k.

 

The Traditional IRA has promising advantages for those qualified:

  • Depending on your circumstances, you may be able to deduct some or all of your IRA contributions from current income.
  • Funds in your IRA, including earnings and gains, are normally not taxed until they are distributed.

 

Example:

In 2017 Susan is single, and she is covered by a retirement plan at work in Charlotte NC. With a Traditional IRA, she is able to figure out that her adjusted gross income should be less than $50,000, and she should receive the full 2017 Traditional IRA deduction. In May 2018 Susan plans to marry George. He is also covered by a retirement plan at his Winthrop University position in Rock Hill SC. George earns a considerably higher income than Susan. As a result of their upcoming marriage, George and Martha will need to determine with their tax advisor if they will qualify for a partial or full deduction for their Traditional IRAs in 2018.

 

Updated by Kristin P. Sinclair: A Accu Tax

in Charlotte NC and Rock Hill SC

November 1, 2018   (803)329-0609

KPS: More information is available at IRS.gov.

See Publication 590-A and Publication 590-B.

 

 

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