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A traditional IRA lets you postpone taxes

Want to put off your tax bill while you put away money for your retirement? Think traditional IRA.

What is a traditional IRA?

A traditional IRA is a type of individual retirement account that lets your earnings grow tax-deferred. You pay taxes on your investment gains only when you make withdrawals in retirement.

Other traditional IRA advantages

Tax-deductible contributions

If you're not covered by a retirement plan at work, you can deduct the entire amount of your IRA contribution on your income tax return. For the 2019 and 2020 tax years, this would be up to $6,000 annually, or $7,000 if you're 50 or older.

No income limit

There's no maximum income limit. You can invest in a traditional IRA no matter how much money you earn.

Some things to think about

Age limit on contributions

As a result of changes made by the SECURE Act, you can make contributions to a traditional IRA for 2020 or later regardless of your age. You cannot contribution to a traditional IRA for 2019 if you reached age 70½ or older in 2019.

Mandatory RMDs

The CARES Act provides a temporary waiver of RMDs for 2020. If you would have had an RMD obligation for 2020, you do not have to take your RMD for 2020 if you don't want to.

If you have already taken a withdrawal in 2020 that would have represented an RMD, you may be eligible to roll the money over within 60 days, subject to IRS rollover rules (including the 60-day rollover deadline and the IRA one rollover-per-365 day rule). Distributions from inherited IRAs are not eligible to be rolled over.

Note: The IRS has extended the 60-day rollover deadline for some distributions, but not all. IRS guidance provides that if the 60-day deadline to complete a rollover ends on or after April 1, 2020, but before July 15, 2020, the rollover deadline is extended until July 15, 2020. If you take an RMD this year and want to roll all or part of the distribution back to an IRA, this extension may provide additional time to complete the rollover. (Please note that this extension does not apply if your 60-day rollover deadline would have ended prior to April 1, 2020.)

For more information about the rollover extension and waivers of the 60-day rollover requirement, go to irs.gov or consult a tax advisor. It's possible the IRS may issue additional clarification in the future regarding rollovers of amounts that would have been RMDs, but for the waiver.

You must begin taking required minimum distributions (RMDs) from your account by April 1 of the calendar year following the year you reach age 72 (age 70½ if you attained age 70½ before 2020).

Taxable withdrawals

Withdrawals may be subject to federal income tax.

The sooner, the better

The younger you are when you open your IRA, the greater your saving potential because you get that tax-free compounding clock ticking longer and harder for you.

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REFERENCE CONTENT

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Compounding

The snowball effect that happens when your earnings generate even more earnings, not only on your original investments, but also on any interest, dividends, and capital gains that accumulate. That means that your "money makes money" and can grow faster over time.