What is an IRA?

An IRA is an Individual Retirement Account. IRAs were set up and designed by the federal government in order to give people an incentive-in this case, a tax incentive-to save for their retirement. The basic way that an IRA works is that you can put a certain amount of money into a special account every year. This account is managed by some sort of financial institution, like a bank, or it can be your mutual fund, or it can be controlled and managed by a stockbroker or your life insurance company. Your money can be either tax-free or tax-deferred, depending on the kind of IRA you open: Roth or Traditional.

Traditional IRA

So what is a traditional IRA? A traditional IRA is, essentially, just a personal savings account with specific tax benefits that are linked to the rules for contributions and withdrawals.

The money that you contribute to your traditional IRA can be tax-deductible, but it depends on your modified adjusted gross income as determined by the Internal Revenue Service. You are allowed to contribute to a traditional IRA for every year that you have received compensation, up until the age of 70 ½. If you don't work for a year, you can't contribute to your traditional IRA unless you have received alimony or you and your spouse file a joint return.

There are no rules for how much you can contribute to your traditional IRA.

Rules for withdrawing from a traditional IRA

While you can earn as much as you want and contribute as much as you want to a traditional IRA, you can't do whatever you want when it comes to taking money out of your traditional IRA. Here are some of the fundamental for withdrawing money from your traditional IRA. For more specific information, consult IRS Publication 590.
The money that you put in your traditional IRA won't be taxed until they are taken out. This can be for your benefit, since chances are that you will be in a lower tax bracket after you retire as opposed to while you're working full time.

You can withdraw money from a traditional IRA at any time. But remember the following rules before you withdraw your money:

1. All withdrawals from a traditional IRa are taxed as income.
2. If you withdraw money before the age of 59 ½, you may be charged an extra 10% penalty tax.
3. You can avoid the 10% penalty tax if you qualify. While you should consult IRS Publication 590 for more information, some of the basic qualifications are a death, a disability, particular expenses related to higher education, or a qualifying first-time home purchase.
4. You can start withdrawing money from your traditional IRA once you reach the age of 59 ½, without penalty.
5. You are required to start withdrawing money from your traditional IRA by April 1 of the year following the year that you turn 70 ½.
6. Every year after you turn 70 ½, you are required to withdraw a required minimum amount.
7. If you do not withdraw the required amount each year after turning 70 ½, you will be charged a penalty. Contact the IRS for more information.
8. Basically, the amount of money that you are required to withdraw is determined by dividing your account balance at the end of the previous calendar by a particular number determined by your age. Consult Publication 590 for that number.