Planning for retirement?
An IRA, or Individual Retirement Account, is one way to save money for your golden years. It is an investment account that offers tax advantages while you save for your retirement through yearly contributions.
There are different IRAs, each with different rules, regulations and tax advantages, including the traditional IRA, which is available to anyone who has earned income during the year. A traditional IRA is one of the best options for retirement savings, according to personal finance advisor publisher Kiplinger. Here are five things to know about a traditional IRA:
1. A Traditional IRA’s contributions could be tax deductible depending on your employment status and you may not pay taxes until it’s time to withdraw funds, so your money grows tax-deferred.
2. A Traditional IRA allows tax deductible contributions of up to 100 percent, depending on your annual gross income. Your earnings for the year, though, must cover the IRA contribution. So if you earn $4,000 for the year, that's the maximum you can contribute to an IRA, notes Kiplinger. There is no minimum age for contributing to an IRA. Self-employed people and small-business owners can open a SEP IRA, which allows you to contribute up to 25% of your income.
3. The federal government places an annual cap on contributions to an IRA, adds Kiplinger. People 50 and older by the end of the year can stash away an extra $1,000.
4. While you must have earned income to contribute to a traditional IRA, there is an exception for non-working spouses. A working spouse can fund a "spousal IRA" for the nonworking spouse.
5. If you don't qualify to deduct IRA contributions, you can still contribute money up to the annual limit in a traditional IRA. However, you can't remove the after-tax contributions as tax-free withdrawals. Instead, each withdrawal from a traditional IRA is a combination of nondeductible contributions, deductible contributions and earnings.