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Quick Guide to Traditional IRA Investment

IRA or Individual Retirement Account is an investment option through which people can save funds for their post-retirement life. There are many types of IRAs including Traditional IRAs and Roth IRAs. Both of these IRAs can be created by individuals, who can invest up to a fixed amount every year in these accounts. Two other IRAs – SEPs and SIMPLEs are established by employers.

Traditional IRA contributions are sometimes tax deductible if the individual qualifies for the same. Qualification is based on your income, tax filing status and applicability of any employer sponsored retirement plan. There are no tax holidays for Roth IRA investments.

In case of a traditional IRA, in addition to deduction of tax in certain cases, the tax on the investment can also be deferred until the withdrawal of funds is made. The advantage is that the overall money that you would get at the time of withdrawal is much more if you pay the tax once at the end instead of paying it annually. This is because investing a larger fund will yield more returns.

Any number of IRA accounts can be created before you reach 70. You can invest in a traditional IRA if you have received income, alimony, payment from a qualified pension, profit-sharing, or even money from another retirement plan.

The IRA contribution limit is $5,000 for those below 50 years of age and $6,000 for those who are 50 or above. This limit is adjusted to inflation and those who are above 50 years of age are also allowed catch-up contribution up to $1,000 per year. For every year, the contribution can be made until the last date for filing tax returns.

An IRA could also be useful for people who are changing jobs and are required to shift the money that they have collected in their 401(k) accounts for their retirement. They can park the money in any rollover IRA so that they do not have to pay tax on it.

Once your money is in an IRA, you can use it to invest in most kinds of securities, including stocks, mutual funds, and bonds. Once you reach the age of 59 and a half, you can start withdrawing money from the IRA without having to pay any penalties. You should also know that in traditional IRAs, once you reach 70 and a half, you have to start making some minimum withdrawals every year.