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What is a Traditional IRA – Restrictions and Benefits

A Traditional IRA is very much like a Roth IRA except for the tax treatment. The Traditional IRA’s key advantage is that it allows an individual to make annual tax-deductible contributions to one’s retirement fund, but unlike the Roth IRA, the traditional IRA does not allow for earnings to grow tax-free. Ultimately, it comes down your personal financial situation when determining which IRA account is better for you.

Let’s go into a bit more detail regarding the Traditional IRA:

Traditional IRA Eligibility

Here are the rules to be eligible to fully contribute to a Traditional IRA:

  • All United States taxpayers that are not active participants in an employer sponsored plan are eligible to make contributions to a Traditional IRA plan.
  • The maximum annual contribution is $5,000 per person. Married couples can contribute $10,000. If you are 50 or older you can contribute $6,000 per person annually due to a catch-up provision.
  • Your contributions are tax deductible up to 100%.

Traditional IRA’s are a great way to save money and get a tax deduction at the same time. If you invest $5,000 annually into a Traditional IRA, you can claim a $5,000 tax deduction. This tax deduction will lower your adjusted gross income which lowers your tax liability. You do not have to pay any taxes on your contributions until you withdraw funds or at the age of 70 ½.

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