Traditional IRA

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DEFINITION of 'Traditional IRA'

An individual retirement account (IRA) that allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.

Other variants of the IRA include the Roth IRA, SIMPLE IRA and SEP IRA.

INVESTOPEDIA EXPLAINS 'Traditional IRA'

Traditional IRAs are held by custodians, such as commercial banks and retail brokers, and investors can place IRA funds into stocks, bonds, funds, and other financial assets deemed fit by the custodian. Assets, such as real estate come with heavy restrictions from the IRS, and may be taxed differently.

When the individual begins to receive distributions from a Traditional IRA, the income is treated as ordinary income and may be subjected to income tax. This differs from the Roth IRA, which can offer tax-free distributions. For people over the age of 50, higher annual contribution limits may apply if the IRA has been recently created or under-funded in previous tax years. Distributions are required to come out of the account by the time the owner reaches age 70.5.

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    Choosing a Roth IRA provider is not much different than choosing a provider for a traditional IRA. You are looking for the ... Read Full Answer >>
  3. What are the main differences between a Simplified Employee Pension (SEP) IRA and ...

    A simplified employee pension IRA is a type of traditional IRA that is designed for self-employed individuals or small business ... Read Full Answer >>
  4. What is the Roth IRA 5 year rule?

    The Roth IRA five-year rule usually refers to the penalties incurred for withdrawing from a Roth IRA before five tax years ... Read Full Answer >>
  5. What are some examples of how I could use my IRA savings for college?

    Account holders can use their traditional IRA savings to pay for several qualified college expenses, including books, fees, ... Read Full Answer >>
  6. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  7. Can a person who is retired continue to fund an IRA?

    For the purposes of contributing to an IRA, compensation (i.e. earned income) does not include income from a pension, an ... Read Full Answer >>
  8. What's the best kind of IRA for a 20-something?

    There probably is no 100% correct answer here, but let's break it down. Suppose that you are 23, you've been working for ... Read Full Answer >>
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