An Individual retirement arrangement is an account with certain tax advantages given by the IRS to encourage taxpayers to save for retirement. The main advantage of an IRA is the ability to contribute pretax income, up to a specified annual limit, that can grow tax deferred until it is withdrawn at a later date.
Traditional IRA Specifics
An individual retirement account is a trust or custodial account organized in the United States for the exclusive benefit of a taxpayer or their beneficiaries. The actual written instrument creating the trust must meet all of the following requirements in order to be a valid IRA:
1. The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
2. The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. Rollover contributions and employer contributions to a simplified employee pension can be more than the deductible amount for the year.
3. Contributions must be made in cash. There is an exception to this rule made for rollover contributions.
4. The taxpayer must have a non forfeitable right to the amount at all times.
5. Money in the account cannot be used to buy a life insurance policy.
6. The taxpayer cannot combine assets with other property, except in a common trust or investment fund.
7. Distributions must begin by April 1 of the year following the year the taxpayer reaches age 70 and a half.
Advantages of a Traditional IRA
Generally, a traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. A traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension or an employer or employee association trust account.
The two primary advantages of a traditional IRA are:
1. Contributions may be tax deductible, depending on the circumstances
2. Money in the IRA, including earnings and gains, are not taxed until distributed