Essential InSights

Core Topics for the Everyday Investor

Account Types: Traditional IRA

Account Types: Traditional IRA

A “Catch All” Retirement Plan

Annual Contribution Max: $6,000 or $7,000 if over 50 years old. 

Why we like Traditional IRA’s:

  • Available to anyone
  • Wide variety of investment choices
  • Total control over the amount of control you want
  • Ability to get Fiduciary level investment advice
  • Easy to set up and contribute
  • Tax-deferred growth
  • Can make deductible
  • Nondeductible contributions (these types of contributions are typically used for roth conversions or stashing more money away in tax deferred investments without the tax benefit now)

Why we don’t like Traditional IRA’s:

  • Low contribution limits
  • Limited creditor protection
  • No access to loans
  • Income restrictions
  • Can’t take out without penalty until 59 ½ unless you have a qualifying event 

The InSight-full® financial plan will almost certainly have one of these as a core component for tax mitigation. An IRA is an Individual Retirement Arrangement and most investors will have at least one of these. A traditional IRAs is a tax-deferred savings plan that is mostly a “catch all” for any plan that savers have had in the past because it preserves the qualified status {not a Qualified account like a 401(k)} of those dollars.  The IRA is rarely the best option for maximizing current contributions. Anyone, regardless of age, can contribute to a traditional IRA provided that you have earned income. An IRA may be your only option if you don’t have access to an employer plan or you’re not self-employed.

Traditional IRAs look a lot like a 401(k)’s, including the way it handles taxation and income. The contributions you make can reduce your taxable income (if you fall under the income limits for IRAs) for that year, and the money grows tax-deferred until you begin withdrawing on it. 

Let’s highlight the differences you’ll see from a 401(k).  First, the contribution limits are much lower: $6,000 in 2020, or $7,000 if you’re 50 or older. Second, you will have broad choices between many different financial-services companies, and each of those companies may include a much wider range of investment options and strategies including stocks, bonds, ETFs as well as mutual funds insurance or even non-marketed securities.

In some cases, we will use both an IRA and a 401(k) in the same year, but be careful: your IRA contributions may not be tax-deductible unless your income is below a threshold amount requiring some additional work to be done safely.

essential insights

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Definitions: Equity

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