There are a lot of options to choose from when it comes to retirement savings accounts. Sometimes, it can be a bit confusing to understand all of them. Here’s a basic guide with everything you need to know about traditional IRA accounts. Read on.
There are a lot of options to choose from when it comes to retirement savings accounts. Sometimes, it can be a bit confusing to understand all of them. Here’s a basic guide with everything you need to know about traditional IRA accounts.
Deciding which one is the best retirement account for you can be, sometimes, a little bit overwhelming. Especially if you don’t have all the information you need to make that decision. There are a lot of ways to start saving for your retirement, including Roth IRA accounts and Traditional IRA.
A Traditional IRA is a type of retirement savings account that allows you to save pre-tax money to use during retirement. Similar to a Roth IRA, a Traditional IRA is “tax-advantaged” account because you can deduct your taxes before contributing and then you pay taxes again when you withdraw.
What’s the difference between a Traditional IRA and a Roth IRA?
The difference is, basically, when taxes are paid on your contributions. While all retirement accounts are tax-advantaged, that doesn’t mean account holders avoid taxation.
For Roth IRA, the tax advantage is experienced in the long term, because taxes are paid at the time of contribution, allowing for tax-free withdrawal of the funds, no matter the growth. However, there’s an income cap for contribution: the only ones that are eligible to add to their Roth are those who earn under $139,000 in 2020.
On the other side of the coin, Traditional IRA accounts are considered to be tax-deferred, which means you won’t pay taxes when you contribute to your account, but you will pay taxes when you withdraw the funds.
Who is eligible?
The great part of Traditional IRAs is that almost everyone is eligible. The one requirement is that you have a taxable compensation. What does it mean? That your main source of income is from a salary or wages and not from other methods like interests, rental properties, etc.