What is a Traditional IRA?

A Traditional IRA (Individual Retirement Account) is a personal savings plan that gives you tax advantages for setting aside money for retirement. In 2010 the contribution limit is $5,000 or $6,000 for those age 50 or older. Some of the investments that may be selected inside a Traditional IRA are mutual funds, stocks, bonds and CD's.
Individuals can also transfer or "rollover" their employer sponsored retirement plans (401(k), 403(b), 457, or pension) into a rollover IRA. This type of account transaction is often referred to as a "401(k) Rollover". There is no dollar limit on the amount that can be rolled over from an employer sponsored retirement plan into a new IRA and there are several advantages of doing so.

What are the benefits of a Traditional IRA?

For many investors, contributions to a Traditional IRA are tax-deductible from federal income taxes and also tax-deductible from state income taxes in most states.

A Traditional IRA allows your assets to grow tax-deferred, meaning you won't pay taxes on the dividends and investment earnings until you withdraw the assets. Tax-deferred earnings growth can have a powerful effect over time.

Who can contribute to a Traditional IRA?

Business owners, self employed, independent contractors, employees who do not have retirement plans through their employer and non-working spouses. Investors who participate in an employer sponsor retirement plan such as a 401(k) can also contribute to a Traditional IRA. However the contribution may not be tax deductible depending on your income.

What are the disadvantages of a Traditional IRA?

Low maximum contributions. Business owners, self employed individuals and independent contractors who would like to make greater retirement contributions may want to research a Solo 401(k) or a SEP IRA.

When can I withdraw assets from my Traditional IRA?

Money can be withdrawn from a Traditional IRA after age 59 ½ although you will pay regular income taxes on your distributions. If you should withdraw money prior to age 59 ½ you will incur an additional 10% penalty. For most investors saving for retirement in a Traditional IRA is advantageous. During your higher tax bracket working years you are able to get a tax deduction on your annual contributions, and earn many years of tax-deferred growth on your dividends and investment earnings. Once retired and usually in a lower tax bracket you can withdraw the money as needed from your Traditional IRA.

Can I withdraw from my Traditional IRA and avoid the 10% penalty?

There are several exceptions when you could withdraw money prior to age 59 ½ rule and not incur a 10% penalty, and they are as follows:

• You have non-reimbursed medical expenses that are more than 7.5% of your adjusted gross income (but the distributions can't be more than the cost of your medical insurance).
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving substantially equal distributions according to IRS rule 72T.
• The distributions are for qualified higher educational expenses.
• The distributions are used to buy or build a first home ($10,000 maximum distribution).

When must I take distributions from my Traditional IRA?

Minimum distributions are required by the IRS according to a specific formula once you reach age 70 ½.
Note: Individuals may not be eligible to contribute to a Traditional IRA depending on an individual's income and depending on whether he or she participates in an employer sponsored retirement plan such as a 401(k).