Top Ten Best Traditional IRA of 2023

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Top Ten Best Traditional IRA of 2023

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 IRA” along with the meaning and overview of traditional IRA

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.

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. 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 2023 (or $7,000 if you are age 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. 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.

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 2023, 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 – $1,320 = $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

where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of periods.

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.

  • 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 expense.

Top Ten Best Traditional IRA Providers

Here are the top ten best traditional IRA providers and plans:

1. Fidelity IRA

This is one of the best all-around IRA providers, offering low fees, a wide range of investment options, retirement planning tools, and other banking and investment services. You can open a Fidelity IRA with no minimum deposit and no annual fees, and enjoy access to thousands of commission-free ETFs and mutual funds. Fidelity also has a robo-advisor service called Fidelity Go that can manage your IRA portfolio for a low fee.

2. Charles Schwab IRA

This is another excellent IRA provider that offers low fees, a large selection of investment options, retirement planning tools, and other banking and investment services. You can open a Charles Schwab IRA with no minimum deposit and no annual fees, and enjoy access to thousands of commission-free ETFs and mutual funds. Charles Schwab also has a robo-advisor service called Schwab Intelligent Portfolios that can manage your IRA portfolio for free.

3. Vanguard IRA

This is one of the best IRA providers for index fund investors, offering low fees, a huge selection of index funds and ETFs, retirement planning tools, and other investment services. You can open a Vanguard IRA with a minimum deposit of $1,000 and no annual fees, and enjoy access to over 3,000 commission-free ETFs and mutual funds. Vanguard also has a robo-advisor service called Vanguard Personal Advisor Services that can manage your IRA portfolio for a low fee.

4. Betterment IRA

This is one of the best IRA providers for robo-advisor investors, offering low fees, a diversified portfolio of ETFs, retirement planning tools, and other financial services. You can open a Betterment IRA with no minimum deposit and no annual fees, and enjoy access to a personalized portfolio that is automatically rebalanced and tax-optimized. Betterment also has a premium service that offers access to human advisors for a higher fee.

5. E-TRADE IRA

This is one of the best IRA providers for active traders, offering low fees, a wide range of investment options, trading tools, retirement planning tools, and other banking and investment services. You can open an ETRADE IRA with no minimum deposit and no annual fees, and enjoy access to thousands of commission-free ETFs and mutual funds. ETRADE also has two robo-advisor services called Core Portfolios and Blend Portfolios that can manage your IRA portfolio for a low fee.

6. Merrill Edge IRA

This is one of the best IRA providers for Bank of America customers, offering low fees, a wide range of investment options, retirement planning tools, and other banking and investment services. You can open a Merrill Edge IRA with no minimum deposit and no annual fees, and enjoy access to thousands of commission-free ETFs and mutual funds. Merrill Edge also has a robo-advisor service called Merrill Guided Investing that can manage your IRA portfolio for a low fee.

7. TD Ameritrade IRA

This is another great IRA provider for active traders, offering low fees, a wide range of investment options, trading tools, retirement planning tools, and other banking and investment services. You can open a TD Ameritrade IRA with no minimum deposit and no annual fees, and enjoy access to thousands of commission-free ETFs and mutual funds. TD Ameritrade also has two robo-advisor services called Essential Portfolios and Selective Portfolios that can manage your IRA portfolio for a low fee.

8. Interactive Brokers IBKR Lite IRA

This is one of the best IRA providers for advanced traders, offering low fees, a wide range of investment options, trading tools, retirement planning tools, and other investment services. You can open an Interactive Brokers IBKR Lite IRA with no minimum deposit and no annual fees, and enjoy access to thousands of commission-free ETFs and stocks. Interactive Brokers also has a robo-advisor service called Interactive Advisors that can manage your IRA portfolio for a low fee.

9. Ellevest IRA

This is one of the best IRA providers for women investors, offering low fees, a diversified portfolio of ETFs, retirement planning tools, and other financial services. You can open an Ellevest IRA with no minimum deposit and no annual fees, and enjoy access to a personalized portfolio that is tailored to your goals, risk tolerance, and gender-specific factors. Ellevest also offers access to human advisors for an extra fee.

10. American Funds IRA

This is one of the best IRA providers for mutual fund investors, offering low fees, a large selection of actively managed mutual funds, retirement planning tools, and other investment services. You can open an American Funds IRA with a minimum deposit of $250 or $25 per month (depending on the fund) and pay an annual fee of $10 or $15 (depending on the fund). American Funds also offers a target date series of funds that can adjust your asset allocation based on your retirement date.

Conclusion

A traditional IRA is a powerful tool to help you save for retirement and reduce your tax burden. It offers several benefits, such as pre-tax contributions, tax-deferred growth, and investment flexibility. However, it also has some drawbacks, such as contribution limits, withdrawal rules, and RMDs. Therefore, it is important to compare a traditional IRA with other retirement accounts, such as a Roth IRA or a 401(k), and choose the one that best suits your needs and goals. A financial advisor can help you make an informed decision and create a retirement plan that works for you.

FAQs on Traditional IRA

Q: How do I open a traditional IRA?

A: You can open a traditional IRA with any financial institution that offers IRAs, such as a bank, brokerage firm, or mutual fund company. You will need to fill out an application form and provide some personal information, such as your name, address, Social Security number, and beneficiary information. You will also need to fund your account with an initial deposit or transfer from another account.

Q: How much can I contribute to a traditional IRA?

A: You can contribute up to $6,000 per year to a traditional IRA in 2023 (or $7,000 if you are age 50 or older), as long as you have earned income from work. Earned income includes wages, salaries, tips, commissions, bonuses, self-employment income, and alimony. Earned income does not include interest, dividends, capital gains, pensions, annuities, or Social Security benefits.

Q: Can I deduct my traditional IRA contributions from my taxes?

A: You may be able to deduct some or all of your traditional IRA contributions from your taxes, depending on your income level and filing status. If you are not covered by a retirement plan at work, such as a 401(k), you can deduct your full contribution, regardless of your income. If you are covered by a retirement plan at work, your deduction may be limited or eliminated if your modified adjusted gross income (MAGI) exceeds certain thresholds. For 2023, the thresholds are:

    • $68,000 to $83,000 for single or head of household filers
    • $109,000 to $129,000 for married couples filing jointly or qualifying widow(er)s
    • $0 to $10,000 for married couples filing separately

You can use IRS Form 1040 or 1040-SR to claim your deduction.

Q: How do I withdraw money from my traditional IRA?

A: You can withdraw money from your traditional IRA at any time by contacting your IRA provider and requesting a distribution. You will need to specify the amount and method of payment, such as a check, direct deposit, or wire transfer. You will also need to report your withdrawal on your tax return and pay income tax on the amount of your withdrawal at your current tax rate. If you withdraw before age 59 1/2, you may also have to pay a 10% early withdrawal penalty, unless you qualify for an exception, such as:

    • 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

Q: What are required minimum distributions (RMDs)?

A: RMDs are the minimum amounts that you must withdraw from your traditional IRA each year once you reach a certain age. The purpose of RMDs is to ensure that you do not defer taxes on your retirement savings indefinitely. You must start taking RMDs when you reach age 72 (or 70 1/2 if you were born before July 1, 1949). The amount of your RMD is calculated based on your account balance and life expectancy factor, which you can find in the IRS tables. You can use IRS Form 5329 to report your RMDs and pay any additional tax or penalty if you fail to take them on time.

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