Traditional IRA

A traditional IRA is primarily an individual savings plan. Contributions are made up to a specified limit with the contribution tax deductible. Money invested and earned in a traditional IRA are subject to income taxes at the time of withdrawal. Withdrawals can be made without penalty once you reach the age of 59 1/2 years of age and you must begin withdrawing from your account when you reach the age of 70 1/2.

A traditional IRA must be set up with an IRS approved institution such as banks, some credit unions, brokerages, and so on. A traditional IRA can be established at anytime during the year but contributions for a tax year must be made before the owner’s tax filing deadline. For more information on setting up a traditional IRA, you should contact your accountant, financial institution, or broker.

What are the Advantages of a Traditional IRA?

• Contributions are tax deferred
• Investment income is not taxed until it is withdrawn

What are the Disadvantages of a Traditional IRA?

• Premature withdrawals in excess of contributions are fully taxable and are subject to a 10% penalty
• Contributions are limited each year for each individual
• Withdrawals must begin when you turn 70 ½ years of age
• Failure to make withdrawals on schedule or not withdrawing enough money will result in penalties
• Contributions cannot be made after reaching age 70 ½
• Heirs will owe taxes on earnings

Distribution Rules
If you have more than one traditional IRA, they are treated as a single account when calculating the tax consequences of distributions from any of them. Early withdrawal of funds is subject to income taxes and a 10% penalty.