Seven Things to Know About Traditional IRAs

It's never too early to start saving for retirement. A traditional Individual Retirement Account—or IRA—might be the right investment tool to help grow your savings while helping you achieve financial stability during your retirement years. This type of a personal savings account allows you to contribute pre-tax dollars, reducing your taxable income while growing your nest egg.

Here are 7 things to know about traditional IRAs:

1. You decide when and where to establish an IRA. As long as you have taxable income, you may contribute to an IRA.


2. Even if you have a retirement plan at work, such as a 401(k), you can still boost your savings by funding a traditional IRA. You can contribute to both Roth and traditional IRAs in the same year, but the total may not exceed the annual per person limit. For 2024 and 2025, the annual IRA contribution limit is $7,000. Savers who are age 50 and up are allowed an annual $1,000 catch-up contribution, for a total of $8,000. For details, visit irs.gov. Note: For traditional IRAs, there are income limits on tax deductibility for annual contributions. Please check with a tax consultant for guidance on your specific situation.


3. Contributions to a traditional IRA are tax-deductible during the year you make the contribution. For example, if you earn $60,000 this year and contribute $6,000 to an IRA, you would pay income taxes only on $54,000 this year. 


4. The money you invest will grow tax-deferred until retirement, and at age 59 ½ you can begin making penalty-free withdrawals. You will then pay income tax on distributions from your traditional IRA, but you might be in a lower tax bracket at that time.


5. You manage your options during the investment process. The IRA’s flexible offerings include stocks, bonds and CDs. With solid investments, you’re likely to see your fund grow significantly over time.


6. There is no limit on the number of IRAs you can own. Having multiple IRA accounts may offer you the ability to diversify your retirement savings or channel certain portions of your savings to specific beneficiaries, such as heirs or charities. However, even if you have more than one IRA, you are still limited to the combined total annual contribution noted above.


7. When you change jobs or retire, you can roll your 401(k) into a traditional IRA. But be careful to follow rollover rules. The best route is a direct rollover from the 401(k) custodian to the IRA custodian so you don’t take possession of the money and don’t incur taxes and penalties.

Traditional IRA accounts have specific rules and guidelines, and like any investment there may be risks to consider, including loss of principal depending on the options you choose, so be sure to visit with your accountant or tax advisor if you have questions.