Traditional IRA Facts

Smart investors will thoroughly research and understand their IRA plans.

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Whether retirement is just a few years away, or you have a while before you will seriously start thinking about retiring, you'll want to get information on traditional IRAs. These accounts are designed to save your pre-tax earnings so that you can use the money in your golden years. Once you have access to your IRA investments, there are a number of financial choices you can make to ensure that your money will last for decades.

What Exactly Is a Traditional IRA?

As an investor, you can open Individual Retirement Arrangements at your local bank, or at a brokerage firm or mutual fund company. IRAs allow you to plan for your retirement on your terms, so you can choose how much you'd like to open the account with, and where you'd like to keep the account in the years before retirement. This is different from a 401(k) plan, which is typically an account set up by your employer to which you can contribute a percentage of your earnings for retirement.

Benefits of a Traditional IRA

One of the main reasons that people create IRAs is so that they can receive pre-tax benefits. So, when you deposit money into your IRA, you reduce your taxable income by the same amount. Having a traditional IRA and making regular contributions also means that you'll pay less income taxes at the end of the year. As you keep the funds in your IRA, the money remains tax-deferred until it is withdrawn from the account. You'll also receive bankruptcy protection on your IRA, which means the money is protected from creditors. Some individuals choose to use IRAs in estate planning, as the funds can be passed on to children and grandchildren when the IRA holder dies.

Traditional IRA Eligibility

According the IRS website, if you earn your income, you're eligible to open an IRA, even if you're currently participating in a retirement saving plan that is employer-sponsored. At the time of this publication, the maximum deposit you can make to your IRA in a year is $6,000 if you'll be 50 or older by the end of 2012. Workers who are younger than 50 can contribute $5,000 to their IRAs.

IRA Restrictions and Considerations

To determine whether you should open a traditional IRA, it's important to note that there are a few restrictions. You can't make any more contributions to your account after you reach the age of 70 1/2. This is also the age when you must begin minimum required withdrawals from the account, and you'll have to pay taxes on the amount you withdraw. If you don't need the money at this point and you'd rather leave it in the IRA, you'll be charged a 50 percent penalty on the money that should have been withdrawn -- and you'll be taxed at your normal rate on future withdrawals. There is also a 10 percent penalty if you withdraw your IRA money before you reach the age of 59 1/2. There are a few exceptions this rule -- if you have a disability or have to pay health insurance premiums for at least 12 weeks while you're unemployed, the penalty fee with not apply. The fee will also be waived if you're switching from a traditional IRA to a Roth IRA. Once you withdraw money from your IRA, the money will be taxed at your current tax rate. The contributions were not taxed when you opened the IRA.