Frequently asked questions
About Traditional IRAs
What is a Traditional IRA?
A Traditional IRA is a retirement savings account in which you invest pre-tax dollars and your money grows on a tax-deferred basis, meaning you will not pay taxes on your earnings until you withdraw your funds.
What does IRA stand for?
IRA stands for “Individual Retirement Account.” The word “individual” is key here — an IRA is a retirement savings account you open yourself rather than through an employer.
How does a Traditional IRA work?
Here are a few things you should know about Traditional IRAs:
- Eligibility: Traditional IRAs are open to anyone, however, not everyone is qualified to deduct contributions from their taxes.
- Tax deduction: If you participate in your employer’s retirement plan, you may not be eligible for a tax deduction, but this is not always the case. Depending on your filing status and your income threshold, you still may be able to apply for income tax deduction.
- Contributions: You may make contributions to your Traditional IRA at any age. The IRS determines how much you may contribute per year. To learn more, visit IRS.gov.
- Withdrawals: You may begin withdrawing money from your Traditional IRA at age 59½. The withdrawal will be subject to income tax based on your filing status for that year.
- Required Minimum Distribution: You are required to withdraw a certain minimum amount from your Traditional IRA. For tax years 2019 and earlier, RMDs are required after you reach the age of 70 1/2. Beginning in the tax year 2020, your first RMD must be taken by April 1 following the year you reach age 72. If the money is not needed, many IRA account holders prefer to leave their money in the account so it can continue to earn interest. You can avoid taking RMDs if:
- You’re still working
- You’re still participating in your company’s retirement plan and
- You don’t own more than five percent of a company
The amount of the required minimum distribution is based on your age and your account balance. You can calculate RMDs at IRS.gov.