Types of IRA’s: Traditional Explained

Traditional & Roth IRA’s are the most common and easiest to understand, therefore I will be focusing most of my explanation on differentiating the two. However, both IRA’s are associated with many more rules and regulations outside of the scope of this text. Please consult your tax advisor before making any financial decisions.

• Traditional: is the most commonly used IRA. It’s different in many ways from its Roth counterpart. The most notable difference is the pre-taxed dollars that go into it. That’s right, money deposited into Traditional IRA’s are tax free. Many enjoy this benefit and therefore deduct their contributions from their income when filing their taxes. However there is a catch. Any distributions made out of the account are subject to be taxed. Additionally, when you reach 79 ½ years old (no I don’t know why the half) you are obligated to make a Required Minimum Distribution (RMD). If an RMD is not made or only partially made, the RMD balance not distributed will incur a 50% penalty fee. You are, however, allowed to make distributions when you reach 59 ½, with any realized gains taxed at your regular federal income tax rate. Any distributions made before that age are subject to an additional 10% penalty fee on the amount distributed unless these funds are used to pay for qualifying medical expenses, college tuition, and up to $10k toward the purchase of a first home for yourself, your child, or your parents.