Traditional IRA Explained: Your Guide to Potential Tax-Advantaged Retirement Savings

Are you considering options to potentially enhance your retirement savings while possibly reducing your current tax bill? A Traditional Individual Retirement Account (IRA) may offer tax advantages that could help you work towards building wealth for your future. This guide explains key aspects of Traditional IRAs and how they might fit into your long-term financial strategy.

What is a Traditional IRA?

A Traditional IRA is a tax-advantaged retirement savings account that allows you to make potentially tax-deductible contributions and grow your investments tax-deferred until retirement. This means you may not pay taxes on the growth until you withdraw the money. Traditional IRAs are one of several options available for retirement savings.

How Traditional IRAs Work: Contributions, Investments, and Potential Tax Benefits

The IRS sets annual contribution limits for Traditional IRAs. For 2024, you can contribute up to $7,000 per year to a Traditional IRA, or $8,000 if you’re 50 or older. These contributions may be tax-deductible depending on your income and whether you’re covered by a retirement plan at work. It’s important to consult with a qualified tax professional for advice on your specific situation.

Traditional IRAs offer a range of investment options including stocks, bonds, mutual funds, ETFs, and more. This flexibility allows you to create a diversified portfolio that aligns with your goals and risk tolerance. However, it’s crucial to understand that all investments carry risk, including the potential loss of principal. Past performance does not guarantee future results.

A key feature of Traditional IRAs is that investments may grow tax-deferred. You may not pay taxes on investment gains, dividends, or interest until you make withdrawals in retirement. At that point, you’ll typically pay ordinary income tax on withdrawals.

Traditional IRA Rules and Regulations: Contribution Limits, RMDs, and Penalties

Traditional IRAs come with specific rules:

• Contribution Timeline: You can typically make contributions for a tax year up until the tax filing deadline (usually April 15) of the following year.
• Required Minimum Distributions (RMDs): You must generally start taking required minimum distributions from a Traditional IRA at age 72 (73 if you reach age 72 after December 31, 2022). The specific amount is based on your account balance and life expectancy.
• Early Withdrawal Penalties: If you need to access your IRA before age 59 1/2, you may face a 10% early withdrawal penalty in addition to income taxes. However, exceptions exist for certain situations.

Choosing Between a Traditional IRA and Other Retirement Accounts

To help you understand how Traditional IRAs compare to other retirement accounts, here’s a general comparison table:

Feature	Traditional IRA	Roth IRA	401(k)
2024 Contribution Limit	$7,000 ($8,000 if 50+)	$7,000 ($8,000 if 50+)	$23,000 ($30,500 if 50+)
Tax Treatment of Contributions	Potentially tax-deductible	Not tax-deductible	Generally tax-deductible
Tax Treatment of Withdrawals	Typically taxed as ordinary income	Tax-free (if qualified)	Typically taxed as ordinary income
Required Minimum Distributions	Generally yes, starting at age 73	Generally no	Generally yes, starting at age 73
Investment Options	Varies by provider	Varies by provider	Limited to plan offerings
Employer Match	No	No	Often available

Note: This is a general comparison. Individual situations may vary. Consult with a financial professional for personalized advice.

When considering these options, remember:

• A Traditional IRA might be worth considering if you expect to be in a lower tax bracket in retirement.
• A Roth IRA could be worth exploring if you anticipate being in a higher tax bracket in retirement.
• If you have access to a 401(k) with employer matching, you may want to consider contributing enough to get the full match before considering an IRA.

Opening and Managing a Traditional IRA with M1

M1 offers Traditional IRA accounts with features such as commission-free trading and the ability to create custom portfolios or choose from curated options. You can set up automatic contributions to help stay on track with your savings goals. M1 also provides educational resources to help you make informed decisions.

When it comes to investments, it’s important to choose options aligned with your goals and risk tolerance. Many investors consider a diversified portfolio of low-cost index funds for long-term growth, but this strategy may not be suitable for everyone.

Advantages and Potential Drawbacks of Traditional IRAs

Before deciding if a Traditional IRA is right for you, consider these potential advantages and drawbacks:

Potential Advantages:

• Possible tax deduction on contributions (if eligible)
• Potential tax-deferred growth
• Range of investment options
• No income limits on contributions
• Ability to make catch-up contributions after age 50

Potential Drawbacks:

• Withdrawals typically taxed as ordinary income in retirement
• Required minimum distributions
• Potential early withdrawal penalties
• Income limits on deductibility if covered by workplace plan
• Market risk and potential loss of principal

Conclusion

Traditional IRAs can be a tool to consider in your retirement planning. They offer potential for tax-deductible contributions and tax-deferred growth, which may help you work towards your retirement goals. However, it’s important to consider how a Traditional IRA fits into your overall financial picture, taking into account factors like your current and future tax situation, other retirement accounts, and long-term financial objectives.

Consider your options for retirement savings carefully. M1’s platform offers a range of investment options and tools to help you build and manage your retirement portfolio. Visit our website or speak with one of our financial specialists to learn more about how we can assist you in working towards your retirement goals.

Key Takeaways:

• Traditional IRAs offer potential tax-deferred growth and possible tax deductions on contributions
• Contribution limits for 2024 are $7,000 ($8,000 if 50+)
• You’ll typically pay ordinary income tax on withdrawals in retirement
• Recent legislation has affected some rules for IRA holders
• M1’s platform offers tools and investment options for managing your IRA

Remember, all investing involves risk, including the potential loss of principal. Diversification does not guarantee a profit or protect against loss in declining markets.

FAQ:

Can I contribute to a Traditional IRA if I have a 401(k) at work?

Yes, you can generally contribute to both a Traditional IRA and a 401(k). However, your ability to deduct Traditional IRA contributions may be limited based on your income and workplace retirement plan coverage.

What happens if I need to withdraw money from my Traditional IRA before retirement?

If you withdraw money before age 59 1/2, you may face a 10% early withdrawal penalty in addition to income taxes. However, there are exceptions for specific circumstances.

Can I convert my Traditional IRA to a Roth IRA?

Yes, you can convert a Traditional IRA to a Roth IRA. This is called a Roth conversion. However, you’ll typically need to pay taxes on the amount you convert in the year of the conversion.

How does M1’s platform support Traditional IRA management?

M1’s platform offers features to support your IRA management, including portfolio creation tools, automatic rebalancing, and commission-free trading. Our interface is designed to help you track your progress and make informed decisions about your retirement savings.

How often should I review my Traditional IRA investments?

It’s generally a good practice to review your IRA investments periodically or whenever there are significant changes in your financial situation or goals. M1’s platform provides tools to help monitor your portfolio.

How does a Traditional IRA affect my taxes in retirement?

In retirement, withdrawals from your Traditional IRA are typically taxed as ordinary income. This means you’ll generally pay taxes on both your contributions and earnings at your current tax rate when you make withdrawals.

Can I lose money in a Traditional IRA?

Yes, it’s possible to lose money in a Traditional IRA. The value of your investments can fluctuate based on market conditions. While maintaining a diversified portfolio and a long-term investment strategy may help manage risk, it does not guarantee against loss.

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Disclaimer: This content is for informational purposes only and does not constitute investment or tax advice. M1 does not provide tax or legal advice. Consult with a qualified tax professional or attorney regarding your specific situation. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. M1 Finance, LLC, an SEC registered broker-dealer and Member FINRA / SIPC. SIPC protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). For details, please see www.sipc.org.

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