What is a Traditional IRA?

A Traditional IRA- or Individual Retirement Account, is a personal investment account which allows investors to easily save for retirement. IRAs allow individuals to put up to $5,500 per year or, if you’re over 50, $6,500 per year into the account and then invest that money tax-deferred.


How do Traditional IRAs work?

Traditional IRAs are known to be vey easy to open and use. Any number of financial companies allow you to open an IRA account, at Schrum Private Wealth Management we partner with Fidelity Investments and Charles Schwab.

Once you open your Traditional IRA, you are permitted to contribute up to $5,500 per year (If you are under age 50) and up to $6,500 per year (If you are over age 50) into your account. The IRS allows you to contribute this money tax-deferred, meaning you do not have to pay income tax on the amount of money you contribute to your IRA.

The IRS also allows investors to buy and sell investments in their IRA without paying Capital Gains Tax on any realized gains within the account. Once you turn age 59 ½ the IRS allows you to take money out of your IRA and only pay income tax on that money.


Are there any drawbacks to Traditional IRAs?

Traditional IRAs can be an incredibly powerful way to save for retirement and build wealth; however, there can be drawbacks to these accounts. One drawback to be mindful of are early withdraw penalties. Because IRAs are meant to incentivize savers to save for retirement, the IRS penalizes any money taken out of an IRA before the age of 59 ½ by making them pay a penalty equal to 10% of the amount taken out of the account plus in addition to income tax on the amount taken out of the account.

Less of a drawback but worth noting, is the possibility that contributing to an IRA may not be a savers best option to save for retirement. If your company’s 401k plan, for example, offers an employee match, it may be more beneficial to a saver to focus their contributions first to their companies 401k. Each person’s situation is unique, and savers shouldn’t rush to contribute to their IRA accounts without considering their full financial picture.


How Can we help with Traditional IRAs?

We can help you with everything you need to determine if you would benefit from a traditional IRA, what to do with a current IRA, or how to rollover a 401k to an IRA. While IRAs are great tools for savers to utilize, they are complicated. We are proud to be members of Ed Slott’s Elite IRA Advisor Group.