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How does a traditional IRA works?

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Anonymous

13y ago
Updated: 4/10/2022

One of the most common methods used to save for retirement in the United States is the traditional IRA. Despite this, many people do not know what a traditional IRA is.

IRA is an acronym that stands for Individual Retirement Account. A traditional IRA is used by many people because of the advantages it can provide in regards to the taxes that are paid on the fruits of the investment.

Most people implement a traditional IRA through the retirement programs that are provided for by their employers. With such a plan, a certain amount of money is taken out of an employee's paycheck and placed into the account for the IRA. This is done before taxes are applied to that income. The employer will also usually match the contribution. For example, a business may match a contribution of three percent into an employee's IRA account.

Certain rules, however, must be followed. For example, the contributions made into such an IRA cannot be more than $5,000 for a single year. It also cannot be all of a person's income. These rules may vary depending on certain circumstances. For example, a joint account maintained by a married couple has a maximum contribution amount of $10,000 per year.

One of the benefits of implementing a traditional IRA is the fact that the funds in the account can be used for investments. The kinds of investments that are allowed depend on the financial institution that maintains the IRA. Common examples include annuities, certificates of deposit and mutual funds. In addition to the gains that may be produced from these investments, the funds in the account will also earn dividends and interest.

There are also limits that determine when funds can be taken out of the account. In the US, the funds can only be taken out after a person is 59 years and a half old without any kind of penalty. If taken out earlier, there will be a 10 percent fee on each amount withdrawn. A person must also start withdrawing funds before the age of 70 and a half. If not, up to 50 percent of the withdrawals may be taken by the IRS.

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Jaycee Emard

Lvl 10
3y ago

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