An Individual Retirement Account (IRA) is a personal savings plan that can help you save for retirement on a tax-advantaged basis. Contributing to your IRA may lower the amount of income tax you pay, and qualified distributions from your IRA may be completely or partially free from federal income taxes.
Why You Should Invest in a Traditional (or Individual) IRA
1. Reduce Your Taxes In a traditional IRA, the income you save is generally tax-deferred until retirement or other qualified distribution. That means that any investment earnings you earn within the IRA won’t be subject to federal income taxes until you take money out of the account.
2. Penalty-Free Withdrawals Traditional IRA withdrawals made before age 59 1/2 are generally subject to a 10% federal income tax penalty. However, individuals who qualify for a penalty exception can withdraw money from their IRAs and pay no taxes, as long as the withdrawal is for a qualified purpose such as paying for higher education or starting their own business.
3. Tax-Free Income Earnings in your traditional IRA may be completely free from federal income taxes upon qualified distribution. You’ll also be able to keep the earnings in your IRA tax-deferred until you qualify to take them out of the account.
4. Tax-Sheltered Growth Your IRA funds grow tax-deferred and are sheltered from taxes when you make withdrawals for qualified beneficiaries, such as yourself or a spouse. Any qualified distributions are free from federal income taxes when those beneficiaries sell the underlying investments again.
5. No Required Minimum Distributions If you use a traditional IRA to save for retirement, you may be able to take tax-free distributions as early as age 59 1/2. However, there’s no mandatory required minimum distribution during your lifetime. If you do not need the money, you can leave it in the account and let it continue to grow on a tax-deferred basis.
An IRA can be a valuable long-term savings tool that you can use to set aside money for retirement. Traditional IRAs enable you to earn investment income tax-deferred and withdraw your money penalty-free after reaching retirement age if you become disabled or have financial hardship.