One of the key advantages of a Traditional IRA is the potential for tax-deferred growth. Since contributions are made before taxes, and earnings are not taxed until withdrawal, your investment can grow more quickly over time.
Strategic Retirement Planning: The Tax-Deferred Growth Benefits of a Traditional IRA
Michelle Hutton
Vice President, Financial Advisor, LPL
A Traditional IRA, or Pre-Tax IRA, offers several benefits and considerations for individuals planning for retirement. Contributions to a Traditional IRA are made with pre-tax dollars, which can help lower your adjusted gross income (AGI) for the tax year in which the contributions are made. This means that the money you invest in the IRA is not taxed upfront, but rather, all earnings and contributions are taxed at your current tax rate when you withdraw them.
One of the key advantages of a Traditional IRA is the potential for tax-deferred growth. Since contributions are made before taxes, and earnings are not taxed until withdrawal, your investment can grow more quickly over time. However, it is important to note that once you reach the age of 59 ½, you can withdraw from your IRA without incurring the 10% IRS penalty for early withdrawal. This "magic number" allows for penalty-free access to your funds.
Typically, while you are working, you may be in a higher tax bracket, making the tax deferral aspect of a Traditional IRA particularly attractive. By deferring taxes until retirement, when you are likely in a lower tax bracket, you can potentially reduce the overall amount of taxes paid on your savings.
There are also requirements to consider. For instance, you must begin taking the required minimum distributions (RMDs) once you reach a certain age, which for this year is 73. Additionally, to contribute to a Traditional IRA, you must be employed and under the age of required distributions. In 2024, the maximum contribution to a standalone IRA is $7,000, or $8,000 if you are over the age of 50, allowing for additional catch-up contributions.
By understanding these aspects, you can better navigate the benefits and obligations associated with a Traditional IRA, ensuring a well-planned approach to your retirement savings.
Category: Retirement
