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Traditional IRA

What is a traditional Individual Retirement Account (IRA)? How do traditional IRA taxbreaks work?

A traditional IRA allows any individual with earned income to invest funds pre-tax, although current law has specific restrictions on how much you can deduct based on your income and access to other tax-advantaged retirement accounts. Any gains you make will be tax-deferred, which means you will only pay taxes on those gains when you withdraw them. There may be substantial penalties for withdrawals prior to age 59½.  

Traditional IRA rates depend on the type of investment; here at Liberty, we offer traditional IRA CDs, which give you the tax advantages of a traditional IRA along with the security and guaranteed returns of a CD. 

What are the differences between a Roth vs. a Traditional Retirement Account?

The most important difference between traditional IRAs and Roth IRAs is the timing of your tax break. With a traditional IRA, your contributions are made “pre-tax” (meaning your contributions are deducted from your total income for the year, assuming you meet certain eligibility requirements). With a Roth IRA, contributions are made “after-tax”, so withdrawals are not taxed. Typically, you’d choose a Roth IRA if you think your tax rate will be higher in the future, and a traditional IRA if you think your tax rate will be lower in the future. However, there are federal eligibility requirements that may ultimately determine which type of IRA you are eligible for.

The main advantages of a traditional retirement account are:

  • You can make annual tax-deductible contributions, thus reducing your overall income for the year.

  • There are no income limits – anyone can participate in a traditional IRA. (However, not everyone is eligible for a tax deduction, so choose carefully.)

  • Since contributions grow tax-deferred, and withdrawals are made during the years when you typically are retired and have lower income, the funds you withdraw may be subject to lower tax rates.

  • You can have a traditional IRA even if you have another retirement plan (although, again, you may miss out on some of the tax deductions if you have an employer-sponsored plan).

  • Your contributions are protected in bankruptcy.

  • A traditional IRA can be passed on to your beneficiaries after death.

There are a number of factors to consider when choosing whether to open a traditional or Roth IRA. You don’t have to go to a big bank to open a traditional IRA account. Here at Liberty, we can help you decide if a traditional IRA is right for your financial situation.

What are the benefits of converting a traditional IRA to a Roth IRA (Illinois)? 

If you convert a traditional IRA to a Roth IRA in Illinois, your funds will not be subject to income tax upon withdrawal. That’s because the state of Illinois excludes Roth IRA distributions from state taxable income and does not tax the conversion of a traditional IRA to a Roth IRA.

We can help you convert your IRA to take advantage of these savings. 

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