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What's a Traditional IRA?

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Definition:

"IRA" stands for "individual retirement account." A traditional IRA is a retirement account that's opened and managed by an individual (that's you).

Individuals are allowed to contribute up to $5,500 in a traditional IRA (as of the year 2013). The money you contribute is given similar tax treatment to money that you put in a 401k retirement plan: both are "tax-deferred." That means that you don't pay income taxes on the amount you put in. If you earn $80,000 and you contribute $4,000 to a Traditional IRA, for instance, you'll be taxed as if you made $76,000. (For the sake of simplifying the example, I'm excluding other deductions).

You'll pay taxes on that money when you withdraw it in retirement. You'll pay income tax, capital gains tax and dividend tax.

You can open a Traditional IRA at any brokerage house like Schwab, Fidelity, TIAA-CREF or Vanguard.

Traditional IRA's typically get less attention that their more-famous counterpart, the Roth IRA.

 

Also Known As: Trad IRA

Examples: Sally earns $120,000 per year. She contributes $17,500 to her company 401k plan and another $5,500 to a Traditional IRA. Assuming she has no other deductions, she's taxed as though she only earned $97,000. (Sally will most likely claim other deductions, but that's besides the point).

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