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4 Underrated Perks of a Traditional IRA

When it comes to IRAs, it’s the Roth accounts that get the bulk of the attention. They offer some really valuable perks, including the opportunity to make tax-free withdrawals in retirement. But there’s a lot to love about traditional IRAs as well, and it helps to understand both before deciding which is right for you. Here are four perks of saving in a traditional IRA that you shouldn’t overlook.

1. Accessibility

Traditional IRAs have fewer restrictions than Roth IRAs about who can contribute. High earners aren’t allowed to set aside money in a Roth IRA directly, but they can put funds into a traditional IRA. And since IRAs aren’t workplace retirement accounts, they’re a great option for those who don’t have access to a 401(k) or other retirement plan through their job.

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The only real requirement to contribute to a traditional IRA is that you earn enough income during the year to cover your total contributions to the account, but even there, it’s flexible. Married individuals who aren’t working may still contribute to a traditional IRA as long as their spouse earns enough to cover any retirement contributions made on both of their behalfs. This is known as a spousal IRA.

2. Freedom to invest how you want

Both traditional and Roth IRAs give you the freedom to invest in just about anything, unlike many workplace retirement plans. 401(k)s, for example, limit you to investing in a handful of funds your employer has selected, and these may not always suit your risk tolerance or retirement strategy.

Adding a traditional IRA enables you to invest exactly how you want to. If you’re comfortable choosing individual stocks, you can do that. You could also focus on low-cost index funds if you want to quickly diversify your savings while keeping your fees low.

3. Upfront tax break

Roth IRAs offer substantial tax benefits, but you don’t get to enjoy these until retirement. Traditional IRAs reward you for saving right now by giving you an upfront tax break on your contributions.

If you contributed the maximum $6,500 to a traditional IRA in 2023 ($7,500 if you’re 50+), you’re reducing your taxable income by the same amount this year. For some people, this could be enough to drop them into a lower tax bracket, helping them to hold on to more of their income this year.

4. Tax-free growth until retirement

Your traditional IRA contributions are able to grow tax-free until you withdraw your funds. This means you can put off taxes on your IRA funds until retirement and allow your money to continue growing in the account.

However, the government doesn’t allow you to do this indefinitely. Beginning in the year you turn 73, you have to start taking required minimum distributions (RMDs). These are mandatory annual withdrawals from your traditional IRA. But you may already withdraw more than this to cover your living expenses each year, in which case, you won’t have to worry about them.

A traditional IRA can be a great place to stash some retirement savings this year, especially if you don’t have access to other retirement plans. But you can also pair it with other accounts if you want. You can even save in a traditional and a Roth IRA at the same time. Just make sure your total contributions to both don’t exceed the annual contribution limit for the year.

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