Top Ten Best Traditional IRA of 2024

A traditional IRA is one of the most popular ways to save for retirement in the United States. It is a type of individual retirement account that allows you to make pre-tax contributions and enjoy tax-deferred growth on your investments until you withdraw them in retirement. A traditional IRA can help you lower your taxable income, diversify your retirement portfolio, and access a wide range of investment options. However, a traditional IRA also has some rules and limitations that you need to be aware of, such as contribution limits, withdrawal rules, and required minimum distributions. This article will tell you the “Top Ten Best Traditional IRAs,” along with the meaning and overview of traditional IRA

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Meaning of Traditional IRA

A traditional IRA is an acronym for a traditional individual retirement account. It is a personal savings account that is designed to help you save for retirement. A traditional IRA is different from other types of retirement accounts, such as a 401(k) or a Roth IRA, in the way it is taxed. A traditional IRA allows you to make pre-tax contributions, meaning that you can deduct the amount of your contributions from your taxable income in the year you make them. This reduces your current tax bill and allows you to save more money for retirement. The money in your traditional IRA grows tax-deferred, meaning that you do not pay any taxes on the interest, dividends, or capital gains that your investments earn until you withdraw them in retirement. When you withdraw money from your traditional IRA, you pay income tax on the amount of your withdrawal at your current tax rate.

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Overview of Traditional IRA

A traditional IRA is a flexible and convenient way to save for retirement. You can open a traditional IRA with any financial institution that offers IRAs, such as a bank, brokerage firm, or mutual fund company. Now you can choose from a variety of investment options, such as stocks, bonds, mutual funds, ETFs, CDs, and more. You can contribute up to $6,000 per year to a traditional IRA in 2024 (or $7,000 if you are 50 or older), as long as you have earned income from work. You can also contribute to a traditional IRA even if you participate in another retirement plan at work, such as a 401(k), but your ability to deduct your contributions may be limited or eliminated depending on your income level and filing status. Now you can withdraw money from your traditional IRA at any time, but if you withdraw before age 59 1/2, you may have to pay a 10% early withdrawal penalty and income tax on the amount of your withdrawal. You must start taking required minimum distributions (RMDs) from your traditional IRA when you reach age 72 (or 70 1/2 if you were born before July 1, 1949) and pay income tax on the amount of your RMDs.

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Examples and Calculations for Traditional IRA

Here are some examples and calculations for the topic of traditional IRA:

Example 1:

How much can you save on taxes by contributing to a traditional IRA? Suppose you are single, 35 years old, and earn $50,000 a year. You are covered by a 401(k) plan at work, so your traditional IRA deduction is limited by your income level. For 2024, the deduction phase-out range for single filers is $68,000 to $83,000. Since your income is below the lower limit, you can deduct your full contribution, up to the annual limit of $6,000.If you contribute $6,000 to a traditional IRA, you can reduce your taxable income by $6,000, which means you will pay less income tax for the year. Assuming your marginal tax rate is 22%, your tax savings would be $6,000 x 22% = $1,320. This means your after-tax cost of contributing to your traditional IRA would be $6,000 minus $1,320, or $4,680.

Example 2:

How much will you have in your traditional IRA after 30 years of investing? Suppose you are single, 35 years old, and earn $50,000 a year. You contribute $6,000 to a traditional IRA every year until you retire at age 65. You invest your IRA in a diversified portfolio that earns an average annual return of 8%. How much will you have in your IRA after 30 years? To answer this question, you can use the following formula:

FV = PV x (1 + r)^n

In this case, PV is the amount of your annual contribution ($6,000), r is the annual return (8%), and n is the number of years (30). Plugging these values into the formula, we get:

FV = $6,000 x (1 + 0.08)^30

= $6,000 x 10.06

= $60,360

This means that after 30 years of investing $6,000 a year at an 8% return, you will have $60,360 in your traditional IRA.

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Example 3:

How much will you pay in taxes and penalties if you withdraw from your traditional IRA before age 59 1/2? Suppose you are single, 40 years old, and earn $50,000 a year. You have $60,000 in your traditional IRA and decide to withdraw $10,000 to pay for an emergency expense. How much will you pay in taxes and penalties for this withdrawal? First, you need to determine how much of your withdrawal is taxable. Since you made only pre-tax contributions to your traditional IRA, the entire amount of your withdrawal is taxable as ordinary income. Assuming your marginal tax rate is 22%, your income tax on the withdrawal would be $10,000 x 22% = $2,200.Second, you need to determine if you qualify for any exceptions to the early withdrawal penalty. The IRS imposes a 10% penalty on withdrawals from traditional IRAs before age 59 1/2 unless you meet one of the following exceptions:

• Buying or building your first home (up to $10,000)
• Paying for qualified higher education expenses for yourself or a family member
• Paying for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
• Paying for health insurance premiums if you are unemployed
• Becoming disabled or dying

In this case, let’s assume that none of these exceptions apply to you. Therefore, you will have to pay the full penalty of 10% on your withdrawal. The penalty amount would be $10,000 x 10% = $1,000.

Adding up the income tax and the penalty, your total cost of withdrawing from your traditional IRA would be $2,200 + $1,000 = $3,200. This means that out of the $10,000 you withdrew from your IRA, only $6,800 would be available for your emergency expenses.

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