Traditional IRA

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Definition of 'Traditional IRA'

A traditional IRA is a retirement savings account that allows you to make tax-deductible contributions. The money you contribute grows tax-deferred until you withdraw it in retirement. Traditional IRAs are a great way to save for retirement, especially if you are in a high tax bracket now.

There are a few things to keep in mind when contributing to a traditional IRA. First, you must have earned income to make a contribution. Second, the maximum contribution limit for 2023 is $6,000 ($7,000 if you are age 50 or older). Third, you must be 59 1/2 years old to withdraw money from your traditional IRA without paying an early withdrawal penalty.

There are some advantages to traditional IRAs. First, the money you contribute is tax-deductible. This means that you can reduce your taxable income for the year. Second, the money in your traditional IRA grows tax-deferred. This means that you don't have to pay taxes on the earnings until you withdraw them in retirement.

There are also some disadvantages to traditional IRAs. First, you must pay taxes on the money you withdraw from your traditional IRA, even if you are retired and in a lower tax bracket. Second, if you withdraw money from your traditional IRA before you reach age 59 1/2, you may have to pay an early withdrawal penalty.

If you are considering contributing to a traditional IRA, it is important to weigh the advantages and disadvantages carefully. If you are in a high tax bracket now, a traditional IRA may be a good option for you. However, if you are in a low tax bracket now, or if you think you may need to withdraw money from your IRA before you reach age 59 1/2, a Roth IRA may be a better option.

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