There’s still ample time remaining to make contributions for the year 2024. Regarding individual retirement accounts (IRAs), the spotlight is often on Roth accounts, which offer valuable perks such as tax-free withdrawals during retirement. However, traditional IRAs also have several benefits that are worth considering. To make an informed decision that is right for you, it is crucial to have a clear understanding of both options. Here are four advantages of saving in a traditional IRA that should not be overlooked.
Traditional IRAs have fewer restrictions compared to Roth IRAs when it comes to eligibility for contributions. High-earning individuals are not permitted to directly contribute to a Roth IRA but can allocate funds to a traditional IRA. IRAs are a great choice for people who don’t have access to workplace retirement plans like a 401(k) since they are not dependent on those plans.
The main requirement for contributing to a traditional IRA is having sufficient income during the year to cover the total contributions to the account. Even in this aspect, there is flexibility. Married individuals who are not employed can still contribute to a traditional IRA as long as their spouse earns enough to cover retirement contributions made on behalf of both partners. This is commonly known as a spousal IRA.
2. Freedom to Invest as You Wish
Unlike many workplace retirement plans, both traditional and Roth IRAs offer investors the freedom to choose from a wide range of investment options. For instance, 401(k) plans often limit investment choices to a selection of funds chosen by the employer, which might not align with your risk tolerance or retirement strategy.
By adding a traditional IRA to your retirement savings, you can invest in the manner that suits you best. If you are comfortable selecting individual stocks, you can do so. Alternatively, you can focus on low-cost index funds if your aim is to quickly diversify your savings while keeping fees at a minimum.
3. Upfront Tax Break
While Roth IRAs provide significant tax benefits, they can only be enjoyed during retirement. In contrast, traditional IRAs reward savers immediately by offering an upfront tax break on contributions. By contributing the maximum allowable amount of $6,500 to a traditional IRA in 2024 ($7,500 if you are aged 50 or above), you can reduce your taxable income by the same amount this year. This reduction might even push you into a lower tax bracket, allowing you to retain more of your income for the current year.
4. Tax-Free Growth Until Retirement
Contributions made to your traditional IRA have the potential to grow tax-free until the time of withdrawal. By delaying the payment of taxes on your IRA funds until retirement, you can let your money grow within the account.
Once you reach the age of 73, you will have to begin taking mandatory annual withdrawals from your traditional IRA. Nevertheless, if you already withdraw more than the RMD (required minimum distribution) amount each year to cover your living expenses, you won’t need to worry about this requirement.
A traditional IRA can serve as an excellent vehicle to accumulate retirement savings, particularly if you lack access to other retirement plans. However, you can also combine it with other accounts if desired. It is even possible to save in both a traditional and a Roth IRA simultaneously. Just ensure that your total contributions to both accounts do not exceed the annual contribution limit for the year.