Definition of a Traditional IRA

A traditional IRA is a popular investment vehicle in the United States. Unlike comparable savings methods like the Roth IRA, the traditional IRA is available to any individual with a sufficient income to make payments into the IRA. However, it’s important to know how they work prior to investing; in the following, you’ll find out more about the advantages and disadvantages of Traditional IRAs.

The biggest advantage of a traditional IRA over other similar investment types — most notably the Roth IRA — is that the contributions you make into it are tax deductible under most circumstances. With a Roth IRA, the payments you make into it lack this feature. However, the distributions from your traditional IRA at maturity are taxed, which is not the case with a Roth IRA. Thus, if you don’t expect to be in a very high tax bracket when you cash out upon retirement, a Traditional IRA may be a better option for you. For complicated reasons, there’s also speculation that the traditional IRA’s closest competitor, the Roth IRA, will be subject to new taxes in the coming years, making the traditional IRA a better option for the risk averse.

One of the downsides to traditional IRAs is that a person has to meet certain eligibility requirements to get the tax benefits from the IRA, which often requires being below a certain maximum income to gain the full benefit. As mentioned, the withdrawals you eventually make from your traditional IRA are included in your gross income, which isn’t the case with Roth IRAs. For those who don’t plan to retire early, the traditional IRA can be a bad option, as it begins to force distributions at the age of 70 1/2, and if you don’t take these distributions you end up subjected to severe penalties.