Traditional IRA

Traditional IRA

A tax-deferred individual retirement account that allows annual contributions of up to $2000 for each income earner. Contributions are fully deductible for all individuals who are not active participants in employer-sponsored plans or for plan participants within certain income ranges.

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Traditional IRA

An investment retirement account in which a worker makes tax deductible contributions up to a certain limit throughout his/her working life. Unlike Roth IRAs, contributions are tax deductible but withdrawals are taxed, effectively deferring tax on the account until the worker begins making withdrawals in retirement. Importantly, however, tax deductibility of contributions depends on one's tax bracket. The limit to annual contributions varies by year and is indexed to inflation. Traditional IRAs are allowed to invest in securities and, in practice, normally own common stock and certificates of deposit. See also: 401(k).

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Traditional IRA

What Does Traditional IRA Mean?

A qualified retirement account 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 a Traditional IRA. Contributions to a Traditional IRA may be tax-deductible, depending on the taxpayer's income and 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, mutual fund companies, and retail brokers; investors can use IRA funds to invest in stocks, bonds, funds, and other financial assets. Assets such as real estate come with heavy restrictions from the IRS and may be taxed differently. Distributions from a Traditional IRA are treated as ordinary income and may be subjected to income tax. This is different from a Roth IRA, which can offer tax-free distributions. For people over age 50, higher annual contribution limits may apply for a relatively new IRA or one that was underfunded in previous tax years. IRA withdrawals must begin when the IRA owner reaches age 70.5 years.

Related Terms:
• Annuity
• Individual Retirement Account—IRA
• Required Minimum Distribution—RMD
• Roth IRA
• Tax Deferred