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Investor's Perspective: Traditional IRA Explained

Updated: Nov 18, 2019

For starters, a traditional IRA is a type of individual retirement account that derives its name based on the tax treatment of this investment vehicle. The tax treatment of a traditional IRA allows your investment portfolio to grow tax-deferred until you begin to make withdrawals during retirement. In many cases your contributions to a traditional IRA are tax-deductible.

For example, if you contribute $5,000 to your traditional IRA in a given year you may be able to claim that amount on your income-tax return in which case the Internal Revenue Service (IRS) will not apply a tax to those earnings. On the other hand, your funds will be taxed at the ordinary income tax rate upon withdrawal during retirement.

Traditional IRA Restrictions

If you are under 50 years of age your contribution limit to a traditional IRA is $6,000 for 2019. If you are over the age of 50 you will have a higher annual contribution limit based on what is known as the "catch-up contribution provision," which enables you to contribute an additional $1,000.

At 70 1/2 years old you are no longer allowed to contribute to a traditional IRA. Required minimum distributions (RMD) also begin at the age of 70 1/2.

Traditional IRA Benefits & Precautions

The clear benefit and attraction of a traditional IRA are that it grows tax-deferred. However, you must be very careful in deciding if you should implement a traditional IRA account into your investment strategy. A traditional IRA may or may not be a suitable fit for you depending on your unique situation.

Due to the tax treatment of a traditional IRA, you need to identify where you are today in terms of net worth, clearly define where you want to go, and then decide on the best plan of action to get there.

Always seek the advice and assessment of your trusted advisor before you proceed with any investment decisions.

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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.

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