Next video:
Loading the player...

A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.

Its primary benefit is the opportunity to invest pretax income up.

Traditional IRAs are taxed as ordinary income once withdrawals are taken. Many investors find themselves in a lower tax bracket in retirement, so they end up paying a smaller tax bill once they need money from their Traditional IRAs.

Suppose an investor puts $5,000 into her Traditional IRA. Only $3,500 would go into the investment for anything that can’t be made with pretax dollars, assuming she’s in the 30 percent tax bracket. But with a Traditional IRA, the entire $5,000 goes into the investment.

The contribution limit for a Traditional IRA in 2016 was $5,500, or $6,500 for anyone older than 50. Married people whose incomes were less than $184,000 in 2016 could contribute the full amount to their Traditional IRAs that year. Yearly incomes above $184,000 were subject to different limits.

Most withdrawals in 2016 made before an account owner turned 59 and one-half were subject to a 10 percent penalty. Account owners must take withdrawals known as required minimum distributions at age 70 and one-half.

Contribution and income limits may be subject to annual change. Investors should check with an advisor or the IRS.

Contributions to a Roth IRA cannot be made with pretax dollars. Other IRA types include SIMPLE and SEP, which enable certain businesses to provide retirement plans for employees.

Related Articles
  1. Retirement

    Why a Roth IRA May Be the Better Choice

    Both traditional and Roth IRAs are good for funding retirement, but here's why the Roth is better.
  2. Retirement

    A Layman's Guide to Traditional and Roth IRAs

    Traditional and Roth IRAs have similarities and differences, but both help you save for retirement.
  3. Retirement

    Which Is Better, a Traditional IRA or Roth IRA?

    Traditional IRAs and Roth IRAs have different benefits, but both are great for retirement savings.
  4. Retirement

    The Best Bet for Taxes: Traditional or Roth IRAs?

    Choosing a Traditional IRA over a Roth IRA, or vice versa, depends on financial situation and long-term goals, especially if you want to trade.
  5. Retirement

    Top 10 Mistakes To Avoid On Your IRA

    IRA rules are complicated. It's easy to make mistakes – and they can cost you big time.
  6. Retirement

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  7. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
Hot Definitions
  1. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  2. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  3. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  4. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  5. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  6. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
Trading Center