How Do I Know If My IRA is Traditional?
Traditional IRAs allow you to save pretax money and grow tax-deferred. Any withdrawals are generally subject to income tax, while early withdrawals typically incur a 10% penalty.
Investing in a traditional IRA could help lower your tax bill this year; but be wary: Uncle Sam wants his share!
Check the Documents
When identifying which kind of IRA you own, the easiest way to do so is by looking at the paperwork from when you opened your account. Usually, a financial institution or brokerage firm (known as “custodian”) will specify what kind of account it is on this document. You should also be able to review your previous tax year paperwork to be certain which kind you own; if necessary contact your custodian directly for guidance or ask their assistance with identifying it further.
Traditional IRAs allow you to deduct contributions from your taxes, which helps lower annual income and the IRS obligations. But once your withdraw the earnings of your IRA in retirement, taxes will still apply when taking withdrawals, or required minimum distributions; you should start taking these withdrawals by the year 72 (this age has been revised multiple times); until that point, withdrawals remain tax-deferred until Uncle Sam takes their cut of your investments.
Check the Account Name
Due to an ever-increasing variety of savings accounts, investment funds, and brokerage accounts available to savers, it can be easy for people to lose track of their IRAs. A great place to begin looking is at your paperwork from when you opened your account – it will detail the type of IRA account that exists.
Traditional IRAs allow you to choose your investments freely without being limited by an employer-mandated menu. However, if you’re uncomfortable managing this yourself or don’t feel confident doing it on your own, robo-advisors provide broad diversification depending on your investing horizon and risk tolerance at a fraction of what an investment pro would charge. Keep in mind that withdrawing funds before age 59 1/2 incurs a 10% penalty tax; by contrast Roth withdrawals are tax free while self-employed people may prefer SEP or SIMPLE IRAs instead.
Check the Custodian
Custodians for Individual Retirement Accounts should offer a diverse array of investment choices. Alongside traditional stocks and bonds, IRAs should have access to alternative assets like real estate, private equity and promissory notes that can provide alternative investments that may be more complex for investors to manage. It is crucial that these assets be handled by an experienced team; otherwise the process can become cumbersome and require support and guidance from them as you navigate this investment landscape.
Keep an eye out for any company charging excessive fees, such as account maintenance fees, mutual fund loads and commissions. Furthermore, the best custodians provide transparent fee schedules so you can easily compare costs.
No matter the situation – from having to roll over an old employer’s 401(k) plan or simply needing additional retirement savings – an IRA could be just what’s needed to help save for retirement. Just keep your tax status in mind as traditional IRA contributions tend to be pre-tax now but then become taxable once withdrawn upon retirement.
Check Your Age
One way to quickly determine whether your IRA is traditional is to look at its age requirements. You will generally need to start taking required minimum distributions (RMDs) once you reach a certain age – similar to most other retirement accounts such as 401(k). However, due to recent legislation called the Setting Every Community Up for Retirement Enhancement Act which postponed these requirements for traditional IRA owners.
Your IRA investments can take several forms depending on your personal preferences and investing horizon. If you prefer selecting your own investments directly, using an online broker or self-directed IRA could be ideal; otherwise robo-advisors or target date funds offer low fees while broad diversification.