When Should I Open a Traditional Ira?
If you earn taxable income, you can open a traditional IRA whenever you're ready to start investing money for retirement. Your contributions to a traditional IRA, or Individual Retirement Account, are taken from your income before taxes, which means that you will owe income tax on these funds after you retire. By comparison, contributions to a Roth IRA are taken from post tax income, so you will owe no taxes as long as you meet IRS eligibility requirements and know the Roth type limits.
A traditional IRA is gives you the freedom to contribute money towards your retirement goals and earn tax deferred interest and dividends, regardless of your employment status. You may contribute to an IRA if you have a regular employer or if you are self employed. In today's fast paced work environment, an IRA provides a stable way to build a retirement income for the future, no matter where you happen to be working.
Tax Advantages
Many investors decide to open a traditional IRA when they change jobs. If you've been contributing to a 401k or 403b retirement plan through your employer and your employment comes to an end, you may be eligible to have the funds in your employer sponsored account rolled over to a traditional IRA. By rolling over a tax deferred, employer sponsored retirement account to an IRA, you can usually avoid tax penalties. If you roll over your employer sponsored account to a Roth IRA, you may be charged tax on these funds.
If you decide to start working for yourself, it may be a good time to open a traditional IRA. Your contributions are tax deductible, which means that you can reduce your tax burden by contributing to an IRA. If lowering your income tax is important to you, opening a traditional IRA may give you the break you need. Contributions to a Roth IRA are not tax deductible; however, you will not owe income tax on your distributions from a Roth if you are at least 59 1/2 and have had the account for 5 years.
You can open a traditional IRA as soon as you start earning money that is subject to income tax. Retirement planning specialists usually recommend that you begin contributing to a retirement account as soon as possible after you start working. If you've just started a new job and you aren't eligible to participate in the employer's plan for the first year of employment, you can get a head start on your financial goals for the future by opening a traditional IRA.
Income Limits
A traditional IRA may be the best option if you have a higher than average income. If you earn more than the maximum income established by the IRS, you cannot contribute to a Roth IRA during that year. However, you can contribute to a traditional IRA if your income exceeds these limits. You may not be eligible for the same tax deductions as an investor in a lower income bracket, but you may make contributions and accrue tax deferred interest on a traditional IRA.
The best time to open traditional IRAs is when you are actively working and have a number of years ahead of you to let your contributions grow. When you are earning an income and making contributions to a traditional IRA, it is likely that you will be in a higher income tax bracket than after you retire. After you stop working and you're ready to begin collecting distributions from your IRA, you may owe less tax than you would have paid when you were young and earning a full salary.
Did you Know?
The Roth IRA is a retirement account that is funded with post-tax income. You pay taxes on your income this year as you would during any year and invest the funds in the Roth. Since taxes have been paid before investing you never pay income taxes on those funds in the future.
