Monday, December 13, 2021, 5:38 PM
Financial planner Darcy Bergen recently discussed Traditional IRA rules you need to know.
PEORIA, AZ / DEC. 13, 2021 / Experts suggest saving for retirement as early in life as possible. However, it can be difficult to begin saving for retirement if you don’t fully understand your options. Financial planner Darcy Bergen recently discussed the rules you’ll want to know when contributing to a Traditional IRA.
What Is an IRA?
Bergen began by explaining that an IRA is a personal retirement account. An individual can make a pre-tax contribution, and that contribution grows over time tax-deferred. The individual then pays income tax on withdrawals made from the traditional IRA.
“There are many benefits to a Traditional IRA,” Darcy Bergen said. “These include cutting your tax bill, saving from retirement, and having many investment opportunities to choose from. A qualified financial planner can help you determine if an IRA is a good retirement option for you.”
Traditional IRA Rules
Several rules apply to Traditional IRAs. There are contribution limits per year of $6,000 in 2021, and $7,000 in 2022 for individuals 50 or older. These contribution limits remain the same, even if you’re also contributing to a 401(k) or another workplace savings plan. Contributions to an IRA can be made by transferring money from another retirement account.
Traditional IRAs are not taxed until you begin using the money. Early withdrawals are taxed as income and include a 10 percent penalty fee. Withdrawals in retirement are simply taxed as income.
Additional Traditional IRA rules include:
- You can take distributions without penalty beginning at age 59 1/2.
- You can wait to take distributions from your Traditional IRA, but must begin taking distributions once you reach 70 1/2 or 72, depending on when you were born.
- Everyone is eligible for a Traditional IRA.
Benefits a Traditional IRA
There are several benefits of choosing a Traditional IRA over other retirement account options. One of these advantages is that there are no income limits to open or contribute to a Traditional IRA.
Traditional IRAs grow tax-deferred. This means you pay taxes later than with a standard brokerage account. Another major benefit of a Traditional IRA is that you can use the money to pay for some college expenses without paying a penalty for withdrawing early. However, it’s important to remember that you’ll pay taxes on that withdrawal.
Up to $10,000 of a Traditional IRA can be put toward the purchase of your first home. Similar to the above-mentioned college expenses, you’ll pay taxes on the distribution you take for the home. However, a penalty fee will not be applied.
Traditional IRA Cons
Bergen explained that a Traditional IRA may not be ideal for everyone, especially those who want to take their money out of the Traditional IRA early. Those who take distributions before age 59 1/2, incur an additional 10 percent penalty fee.
Some individuals also see the need to take minimum distributions out of the IRA at age 72 as a disadvantage. Minimum distributions are not required with a Roth IRA.
Some workplace retirement plans also alter the ability to deduct Traditional IRA contributions. Higher-income individuals may lose the ability to deduct Traditional IRA contributions.
Contact Darcy Bergen
Darcy Bergen of Bergen Financial has been helping individuals plan for retirement for decades. He suggested making an appointment with a qualified financial planner to discuss which retirement planning options are best for you.
Investment advisory and financial planning services offered through Simplicity Wealth, LLC, a Registered Investment Advisor. Sub-advisory services are provided by Advisory Alpha, LLC, a Registered Investment Advisor. Insurance, Consulting and Education services offered through Bergen Financial Group. Bergen Financial Group is a separate and unaffiliated entity from Simplicity Wealth and Advisory Alpha.