What Type of IRA is Pre-Tax?

IRAs are tax-advantaged retirement accounts offered by banks, traditional brokers and certain fund companies as custodians. Contributions may be deducted and investments grow tax-deferred.

These accounts generally impose a 10% early withdrawal penalty; however, there may be exceptions.


When planning for retirement, it is essential that you consider the tax implications of your savings plan. Tax-deferred accounts offer valuable tax benefits by allowing pre-tax dollars to be contributed pre-tax while earnings remain untaxed until withdrawals occur; however withdrawals made prior to age 59 1/2 could incur a 10% federal tax penalty tax rate.

Many companies offer pre-tax retirement accounts as an investment vehicle. Common retirement account offerings are the 401(k), 403(b) plans from nonprofit organizations and 457 plans offered by local government agencies; individuals can also set up SEP IRAs for self-employment or small business use that function similarly to traditional IRAs with contribution limits but with earnings remaining tax free until withdrawal; unlike other accounts these don’t require minimum distributions either.

Penalty-free withdrawals

Traditional and SEP IRAs allow workers to save pre-tax for retirement on an individual or employer-based basis, making these accounts popular with self-employed individuals and small businesses alike. If an employee or owner takes early withdrawals from one of these accounts they will incur an early withdrawal penalty of 10%; however there are exceptions provided by the IRS so it’s essential that those holding an IRA know when taking an early withdrawal so they can effectively manage their financial needs without jeopardizing long term retirement savings plans.

If you withdraw funds from an IRA before age 59 1/2, generally speaking you will owe ordinary income tax and a 10% penalty; this does not apply to Roth IRA withdrawals.

IRS allows penalty-free withdrawals for unexpected expenses like higher education costs or home purchases; however, you must use these withdrawals by the end of the year to cover these expenses. You may also withdraw funds without incurring penalties should you become permanently and totally disabled.

Taxes on withdrawals

Many individuals don’t understand the taxes associated with withdrawing money from an IRA. It depends on factors like type, age and purpose. Sometimes you may owe income tax or even an additional 10% penalty; but sometimes nothing at all may be due.

Withdrawals from traditional and rollover IRAs typically incur ordinary income tax as well as a 10% early withdrawal penalty if taken before age 59 1/2; however, this penalty can be avoided by withdrawing funds for first-time home purchase or qualified education expenses.

Self-employed individuals can save pretax dollars through solo 401(k), SEP IRA or SIMPLE IRA accounts. While these have lower contribution limits than traditional and Roth IRAs, you still get a tax deduction for your contributions. These accounts can also help save for medical bills, childcare costs or educational costs.


IRAs are tax-advantaged savings accounts that can be opened with any financial institution – bank, broker, robo-advisor – making them an excellent way for people without access to workplace retirement plans like 401(k). They offer many investment choices and accumulate tax deferred or tax free growth until age 59 1/2 before withdrawals may start without penalties.

Traditional IRAs allow pretax contributions; however, you may not be able to deduct them if either you or your spouse participates in another workplace retirement plan like 401(k). Eligibility depends on filing status and modified adjusted gross income.

Your investment options for retirement plans include traditional and Roth IRAs that invest money in stocks, bonds, mutual funds, exchange-traded funds or even traditional mutual funds. When changing jobs you may also open a rollover IRA that lets you transfer any employer-sponsored retirement plan funds into one that suits you better. In general you can open both traditional or Roth IRAs using earned income but there may be annual contribution limits or restrictions placed upon them.

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