What is a traditional IRA?
A traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions, and the investments in the account grow tax-deferred. That means you won’t owe capital gains taxes on the investment returns, dividends, or interest in the account. You can buy and sell a wide range of assets and asset classes in a traditional IRA, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Using a self-directed traditional IRA, you can even invest in cryptocurrencies and other less traditional retirement investments, like gold and real estate. You’ll owe regular income tax on some or all of your contributions and earnings when you withdraw from your traditional IRA in retirement. Depending on your annual income and access to a workplace retirement plan, you may be eligible for a tax deduction for your traditional IRA contributions. If you don’t qualify for the tax deduction, your contributions won’t be taxed when you withdraw them, although any investment earnings or interest will be taxable as regular income.
Who Can Contribute to a Traditional IRA?
Anyone who earns a taxable income in a given year can contribute to a traditional IRA, although you cannot contribute more to an IRA than you earn in a year. Non-working spouses may also be eligible to contribute based on their spouse’s income.
How Much Can I Deduct on My Taxes?
The amount you contribute to a traditional IRA isn't always fully deductible. Restrictions on what you can deduct are based on income limits* and whether you or your spouse participate in a retirement plan at work. Once you reach these limits, the deduction begins to phase out, thus reducing the amount you can deduct on your taxes.
* You can deduct your full traditional IRA contribution if you are:
If you're married filing jointly, and you're not covered by a plan at work, but your spouse is, you can take:
You can take a partial deduction if you're covered by a retirement plan at work, and you are:
You cannot take any deduction for contributions to a traditional IRA if you're covered by a retirement plan at work and you are:
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