How Do I Know If My IRA is Traditional?

Traditional IRAs provide tax advantages as you build your retirement nest egg. Contributions made outside an employer-sponsored plan and falling within certain income parameters may be tax deductible.

Withdrawals from retirement accounts are generally taxed as ordinary income unless you qualify for penalty-free distributions (see below). A wealth planner can assist in helping you understand all of your options.


Traditional IRAs provide both an upfront tax break and tax-deferred investment growth, but taxes will still be due upon withdrawal at your current income tax rate (or possibly with an early withdrawal penalty).

To qualify for a traditional IRA, both you and your spouse must receive earned compensation in the form of wages, salaries, commissions, tips, bonuses or net earnings from self-employment. There is no income threshold to open or contribute to one; however contributions made if covered by an employee retirement plan may not be deductable.

As soon as you retire, your IRA requires minimum withdrawals based on your age and life expectancy. Our online RMD calculator can help you to figure out your required minimum distributions (RMDs). However, keep in mind that its tax advantages don’t last forever; they expire at age 73; any withdrawals before then will incur regular income tax rates; so plan wisely!


As their name implies, traditional IRAs provide tax advantages for contributions and earnings. Unlike 401(k)s or other employer-sponsored retirement plans, the government doesn’t tax your earnings or withdrawals until age 59 1/2 when taking distributions in retirement.

Once you turn 72, the IRS gets very concerned about you leaving money in your IRA; consequently they require that a certain minimum amount be withdrawn annually (known as mandatory minimum distributions or RMDs) or they impose a stiff 25 percent penalty fee on missed RMD deadlines.

There are some exceptions to the early withdrawal penalty, such as using your IRA funds for purchasing your first home or unreimbursed medical expenses. Another way to circumvent it is through “substantially equal periodic payments” or SEPPs which must be taken for at least five years and taxed as ordinary income in their initial year then treated as regular income moving forward.


Traditional IRAs allow tax-deferred growth on any investment earnings until you withdraw it in retirement, and may offer tax breaks (up to certain income thresholds) for contributions made. They can even be used by those participating in employer sponsored retirement plans.

Traditional retirement accounts present several disadvantages. Withdrawals from them are taxed as current income upon retirement and, once reaching a certain age, required minimum distributions must begin or face steep penalties.

If you’re considering opening a traditional IRA, first decide how you want to invest your money. There are various online brokers and robo-advisors offering manual or automated investing options; or opening an account at a financial institution offering individual stocks and bonds. However, the IRS discourages holding collectibles such as coins, medals or items such as real estate in an IRA account – for more details, consult a tax adviser.


Withdrawals from traditional IRAs are taxed as income, like any retirement account withdrawals. Therefore, it is crucial that you plan carefully during the early stages of retirement investment life.

Contributing to an IRA provides you with an upfront tax break, while the IRS will collect taxes when taking distributions out.

At age 73, the IRS becomes concerned that you’re leaving all of your money in an IRA forever and therefore requires that you begin taking required minimum distributions (RMDs). RMDs are calculated by dividing the value of your IRA account at December 31 of the prior year by your life expectancy factor and assigning you an RMD amount based on this ratio.

Self-employed and small-business owners may qualify for a SEP IRA, similar to a traditional IRA but permitting pretax contributions of up to 25% of income. You could open one if neither you nor your spouse has access to workplace retirement plans such as 401(k) plans at work and earned income falls below IRS contribution limits in that year.

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