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Traditional IRAs, or Individual Retirement Accounts, are a popular way for individuals to save for retirement while also providing potential tax benefits. In this article, we will explore how traditional IRAs work and the key features of this retirement savings vehicle.

Traditional IRAs work by allowing individuals to contribute pre-tax income to their retirement savings account. This means that the money contributed to a traditional IRA is deducted from the individual’s taxable income for the year in which the contribution is made. As a result, the individual may see a reduction in their tax bill for the year.

Once the money is in the traditional IRA, it can be invested in a variety of financial instruments, such as stocks, bonds, mutual funds, and other options. Over time, the investments have the potential to grow tax-deferred, meaning that any earnings in the account are not taxed until they are withdrawn.

One of the key features of traditional IRAs is that withdrawals are generally subject to income tax at the individual’s ordinary income tax rate. Additionally, withdrawals made before the age of 59 ½ may be subject to a 10% early withdrawal penalty, unless certain exceptions apply. However, once the individual reaches the age of 72 (previously 70 ½), they are required to take minimum distributions from their traditional IRA, known as Required Minimum Distributions (RMDs).

It’s important to note that there are annual contribution limits for traditional IRAs, which are set by the Internal Revenue Service (IRS) and can change from year to year. Additionally, individuals must have earned income in order to contribute to a traditional IRA.

In summary, traditional IRAs work by allowing individuals to save for retirement with potential tax benefits. Contributions are made with pre-tax dollars, investments grow tax-deferred, and withdrawals are generally subject to income tax. While traditional IRAs have specific rules and limitations, they are a valuable tool for individuals looking to save for retirement and reduce their taxable income. If you are considering opening a traditional IRA or have questions about how it works, it’s a good idea to consult with a financial advisor or tax professional for guidance tailored to your individual situation.