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 2020 and 2021 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.
Mandatory RMDs
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
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.