Retiring with a Traditional IRA

Investing money for the future is an important financial decision, and there are many different avenues for long-term investing. One of the most popular ways to prepare for the future is the traditional Individual Retirement Account (IRA). An IRA is similar to a 401(k) in that it is a deferred payment account, which has several advantages.

Having a deferred payment account like a traditional IRA means that money is deducted from your pay check on pre-tax basis. This means that the money you contribute to the IRA is not taxed by the government. In order to be tax exempt the income contributed to the IRA account must be one of the following:

• Salary – from employer or self-employment

• Commissions

• Alimony

• Non-taxable combat pay

A second advantage to an IRA account is your money is invested so that it can grow. The money that is deducted from your pay check is sent to what is called a custodian to invest the money. Custodians can be at banks or brokerage firms and are in charge of investing your IRA contribution in mutual funds, the stock market, bonds or securities.

There is some risk involved with investing money this way. But because an IRA is a long-term investment, this risk can be minimized and won’t be as affected by minor market fluctuations. This allows the money to continue to grow and earn interest.

Another advantage is that IRA accounts are easy to set up. All you have to do is contact a bank, credit union, savings and loan or brokerage firm to get you started.

There are some eligibility requirements in order to contribute to an IRA and in order to be able to deduct it from your taxable income. First, you must earn wages in order to contribute to your traditional IRA. There is an exception if you have received alimony or non taxable combat pay. You can contribute from these forms of income.

In 2008, the maximum amount you could contribute to traditional IRA account was $5,000. However, that number is adjusted for inflation as years pass. So be sure to check with your custodian (your financial contact that handles your traditional IRA) to see what the maximum amount is that you can contribute.

There are some disadvantages to having a traditional IRA account as well. While the money you contribute to a traditional IRA is not taxed, when you withdraw the money, this is considered income and is taxable. Another disadvantage is that you must start withdrawing from your traditional IRA by the time you are 70 ½. And if you choose to withdraw funds before you are 59 ½, there can be heavy penalties and taxes on the money you take out.

If the company you work for does not offer a 401(k) plan, then a traditional IRA plan can help you save for your retirement. If your place of employment does offer a 401(k) plan, then the amount you can contribute to your traditional IRA on a pre-tax basis will be reduced. This is also true if your spouse works for an employer that offers a 401(k) plan but you do not. You may still be limited in the amount of income you can contribute on a pre-tax basis.

Another government regulation to keep in mind is that if both you and your spouse earn wages, you cannot contribute to same traditional IRA.

Because there are many different types of retirement accounts such as a 401(k), traditional IRA, Roth IRA, it’s best discuss with a financial advisor which may be suited for you and your family’s needs.