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Traditional IRA


A traditional IRA offers tax deferral, and that can help you make the most of your retirement savings. When you invest in a traditional IRA, you won’t pay taxes on any accumulated gains, interest, or dividends until the money is withdrawn — leaving more money to benefit from compound earnings.

Who is eligible?

You are eligible to contribute to a traditional IRA if you have earned income. You may make IRA contributions regardless of whether the contribution is tax. You can open a traditional IRA whether or not you are covered by any other retirement plan. However, your ability to deduct any or all of your contributions may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels.

How much can be contributed to a traditional IRA? The contribution limit to a traditional IRA in 2020 is the lesser of:

• $6,000 or 100% of your taxable compensation for the year — if you are under age 50.
• $7,000 or 100% of your taxable compensation for the year — if you will be age 50 or older in 2020.-deductible.

Early withdrawals

If you take a withdrawal before age 59½, you will pay ordinary income taxes as well as an additional 10% federal income tax. Section 72(t) of the tax code defines the circumstances under which the early withdrawal penalty does not apply. These include:

• First-time home buyer — Distributions taken, up to a maximum lifetime limit of $10,000, as a qualified first-time home-buyer distribution.
• Higher education expenses — Distributions taken to pay the qualified higher education expenses of you, your spouse, your child or your grandchild attending an eligible educational institution.
• Medical expenses — Distributions taken to pay for certain medical expenses in excess of 7.5% of your adjusted gross income.
• Disability — Distributions made on or after you become totally or permanently disabled.
• Death — Distributions made to your beneficiary or estate after your death.
• Substantially equal periodic payments — Distributions taken as part of a series of substantially equal periodic payments over your life expectancy (or the life expectancies of you and your designated beneficiary).
• Birth or adoption — Distributions up to $5,000 may be taken within one year after the birth or adoption of a child.

It is best to seek the advice of a tax professional when taking a withdrawal prior to age 59½.

Required Minimum Distributions (RMD)

The IRS requires that you withdraw at least a minimum amount — called a required minimum distribution — from your retirement accounts annually once you attain a certain age. If you attained age 70 ½ on or before December 31, 2019, you are required to receive an annual RMD beginning with the year in which you reach age 70 ½.

If you were not yet age 70 ½ by December 31, 2019, you must receive an annual RMD beginning with the year in which you reach age 72. The first RMD payment can be delayed until April 1 of the year following the year in which you reach the specified age. For all subsequent years you must take the RMD by December 31.

If you delay taking your first year RMD until April 1 of the following year, you will be required to take two RMD payments that year.

Traditional IRAs offer:

• Tax-deductible contributions for certain investors
• Tax-deferred growth potential